The Spatial Effects of Trade Openness: A Survey

This paper surveys the literature on the implications of trade liberalisation for intra-national economic geographies. Three results stand out. First, neither urban systems models nor new economic geography models imply a robust prediction on the impact of trade openness on spatial concentration. Whether trade promotes concentration or dispersion depends on subtle modelling choices among which it is impossible to adjudicate a priori. Second, empirical evidence mirrors the theoretical indeterminacy: a majority of cross-country studies find no significant effect of openness on urban concentration or regional inequality. Third, the available models predict that, other things equal, regions with inherently less costly access to foreign markets, such as border or port regions, stand to reap the largest gains from trade liberalisation. This prediction is confirmed by the available evidence. Whether trade liberalisation raises or lowers regional inequality therefore depends on each country’s specific geography.trade liberalisation, regional inequality, agglomeration, urban systems

Home-Biased Demand and International Specialisation : A Test of Trade Theories

We develop and apply a discriminating criterion to distinguish the two principal paradigms of international trade theory: constant-returns perfectly competitive models on the one hand, and increasing-returns monopolistically competitive models on the other. Our criterion rests on the existence of home-biased demand. It predicts a positive relationship between countries' relative output and their relative home bias in increasing-returns sectors, and no relationship in constant-returns sectors. In implementing the test on data for OECD countries we find that industries accounting for up to two thirds of manufacturing output conform to the increasing-returns monopolistically competitive model.international specialisation; home-market effect; increasing returns

Estimating the rivalness of state-level inward FDI

Decentralized fiscal decision making is more likely to be optimal if regional tax bases are non-rival, in the sense that one region's gain is no other relevant region's loss. We develop a method for estimating the rivalness of tax bases using the underlying structures of the conditional logit, Poisson and nested logit models. We use this method to estimate the effect of state-level capital taxation on U.S. inward foreign direct investment. While the results are rather noisy, the assumption of perfect non-rivalenss can in some cases be rejected, but the assumption of perfect rivalness cannot. Competition over FDI across U.S. states may well be a zero-sum game.firm location, FDI, conditional logit, nested logit, poisson count model

New Economic Geography meets Comecon: Regional Wages and Industry Location in Central Europe

We analyze the internal spatial wage and employment structures of the Czech Republic, Hungary, Poland, Slovenia and Slovakia, using regional data for 1996-2000. A new economic geography model predicts wage gradients and specialization patterns that are smoothly related to regions' relative market access. As an alternative, we formulate a "Comecon hypothesis", according to which wages and sectoral location are not systematically related to market access except for discrete concentrations in capital regions. Our estimations confirm the ongoing relevance of the Comecon hypothesis: compared to pre-2004 EU members, Central European countries' average wages and service employment were still discretely higher in capital regions. Our results point towards an increase in relative wages and employment shares of Central Europe's provincial regions, favoring particularly those that are proximate to the large markets of incumbent EU members.regional wages; industry location; transition economies; Central Europe; new economic geography

Public Expenditure and International Specialisation

We study the impact of home-biased public expenditure on international specialisation in general equilibrium models with increasing returns and monopolistic competition. It is found that home-biased procurement attracts increasing-returns industries to the home country (the "pull" effect) and attenuates the overall degree of industrial specialisation (the "spread" effect). Empirical evidence based on input-output data for the European Union confirms the existence of these links between public expenditure and the location of manufacturing activities.public expenditure; international specialisation; economic geography; European Union; input-output analysis

On the Equivalence of Location Choice Models: Conditional Logit, Nested Logit and Poisson

It is well understood that the two most popular empirical models of location choice - conditional logit and Poisson - return identical coefficient estimates when the regressors are not individual specific. We show that these two models differ starkly in terms of their implied predictions. The conditional logit model represents a zero-sum world, in which one region's gain is the other regions' loss. In contrast, the Poisson model implies a positive-sum economy, in which one region's gain is no other region's loss. We also show that all intermediate cases can be represented as a nested logit model with a single outside option. The nested logit turns out to be a linear combination of the conditional logit and Poisson models. Conditional logit and Poisson elasticities mark the polar cases and can therefore serve as boundary values in applied research.firm location, residential choice, conditional logit, nested logit, Poisson count model

Sectoral Agglomeration Economies in a Panel of European Regions

We estimate agglomeration economies, defined as the effect of density on labour productivity in European regions. The analysis of Ciccone (2002) is extended in two main ways. First, we use dynamic panel estimation techniques (system GMM), thus offering an alternative methodological treatment of the inherent endogeneity problem. Second, the sector dimension in the data allows for disaggregated estimation. Our results confirm the presence of significant agglomeration effects at the aggregate level, with an estimated long-run elasticity of 13 percent. Repeated crosssection regressions suggest that the strength of agglomeration effects has increased over time. At the sector level, the dominant pattern is of cross-sector "urbanisation" economies and own-sector congestion diseconomies. A notable exception is financial services, for which we find strong positive productivity effects from own-sector density.employment density; productivity; european regions; dynamic panel GMM

Does Tax Competition Tame the Leviathan?

We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these effects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating effect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.tax competition; optimal taxation; government preferences; fiscal federalism; direct democracy

A Test of Trade Theories when Expenditure is Home Biased

We develop and apply a criterion to distinguish two paradigms of international trade theory: constant-returns perfectly competitive models, and increasing-returns monopolistically competitive models. Our analysis makes use of the pervasive presence of home-biased expenditure. It predicts that countries' relative output and their relative home biases are positively correlated in increasing-returns sectors, while no such relationship exists in constant-returns sectors. We estimate country-level sectoral home biases through a gravity equation for international and intranational trade, and we use those estimates to implement our test on input-output data for six European Union economies.international specialisation; new trade theory; home-market effects; border effects

Vertical Versus Horizontal Tax Externalities: An Empirical Test

We study taxation externalities in federations of benevolent governments. Where different hierarchical government levels tax the same base, one can observe two types of externalities: a horizontal externality, working among governments of the same level and leading to tax rates that are too low compared to the social optimum; and a vertical externality, working between different levels of government and leading to suboptimally high tax rates. Building on the model of Keen and Kotsogiannis (2002), we derive a discriminating hypothesis to distinguish vertical and horizontal tax externalities based on measurable variables. This test is applied to a panel data set on local taxes in a sample of Swiss municipalities that feature direct-democratic fiscal decision making, so as to maximize the correspondence with the "benevolent" governments of the theory. We find that vertical externalities dominate - they are thus an observed empirical phenomenon as well as a notable extension to the theory of tax competition.