Essays in public economics

The first essay analyzes a model of strategic tax competition with mobile capital and mobile identical consumers. The obtained results are compared to the traditional model with an immobile population. In addition to the fiscal and pecuniary externalities present in the standard model, a new effect shows up in the mobility model to affect provision of the public good. This new effect depends on whether the jurisdictions are net exporters or net importers of capital. Thus, in a symmetric set up, the mobility effect along with the pecuniary externality disappear, yielding unambiguous underprovision of the public good. While in the asymmetric case both models have the same qualitative results, the mobility model strengthens the effects of the pecuniary externality. The second essay analyzes tax competition in the presence of agglomeration effects. In the model with agglomeration, a new effect shows up. This effect reflects heightened government concern about capital flight, which depresses firm productivity by limiting external economies of scale. As a result, capital tax rates end up being lower than in the case where agglomeration effects are not present, worsening the underprovision of the public good. This conclusion holds in both the competitive and strategic versions of the model. The final essay analyzes the interaction between two overlapping jurisdictions (a school district and a city), when one of them (the city) uses TIF (tax increment financing) to finance an improvement in the provision of its public good. Two different results regarding efficiency of public good provision are obtained depending on the equilibrium concept used. With Nash behavior, the result is underprovision of the public good provided by the school district. The second, and more interesting, case is when the school district takes into account that its decisions affect the provision of the city's public good. In this “leader-follower” equilibrium, where the school district plays the role of the leader, the results show that the provision of the school district public good depends on how the city's public good is provided. If the city's public good is underprovided (overprovided) then the school district's public good is overprovided (underprovided).