Market access effect and local tax setting: evidence from French panel data

Abstract

The main purpose of this article is to assess the existence of an agglomeration rent in the French local tax setting. In order to perform that test, we first describe a simple economic geography model in which the main agglomeration force at work is the ‘market access effect’. We then estimate a derived tax-setting equation using spatial panel data for the period 1993–2003. We confirm a positive and significant relationship between the tax rate and market access, which suggests there is a taxable agglomeration rent in the French municipalities. We also observe significant mimic behaviour between French localities when they choose their rate of local business tax and vertical interactions between municipalities and regions.

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