Jofre Monseny, JordiSolé Ollé, Albert2018-01-082018-01-082008https://hdl.handle.net/2445/118911This paper examines the effects of agglomeration economies (AE) on the sensitivity of firm location to tax differentials. An initial reading of the story suggests that, with AE, when a firm moves into a community attracted by a tax reduction, other firms may decide to move in as well. This suggests that AE increase the sensitivity of firm location to local taxes. However, a second version of the story reads that, if economic activities are highly concentrated in space, AE might offset any tax differential, hence suggesting a reduction in this sensitivity. This paper provides a theoretical model of intraregional firm location with Marshallian AE that is able to generate both hypotheses: AE increase (decrease) the effect of taxes when locations are (are not) of a similar size. We then use Spanish municipal data for the period 1995-2002 to test these hypotheses, analyzing the combined effect of local business taxes and Marshallian AE on the intraregional location of employment. In line with the theory, a municipality with stronger AE experiences lower (higher) tax effects if it is sufficiently dissimilar (similar) to its neighbors in terms of size.42 p.application/pdfengcc-by-nc-nd, (c) Jofre Monseny, 2008http://creativecommons.org/licenses/by-nc-nd/3.0/es/Administració localSubvencionsLocal governmentSubsidiesinfo:eu-repo/semantics/workingPaperinfo:eu-repo/semantics/openAccess