DP3109 Taking the Bite Out of Fiscal Competition
Regions can benefit by offering infrastructure services that are differentiated by quality, thus segmenting the market for industrial location. Regions that compete on infrastructure quality have an incentive to increase the degree of differentiation between them. This places an upper bound on the number of regions successfully able to participate in the location market, and limits the dissipation of regional surplus through Tiebout competition. It indicates a process of fiscal agglomeration, through which regional concentrations arise, which does not depend on the circular causation underlying much of the recent literature on economic geography.