Author:
Chong Liu[1] , Yingyan Zhao
[1]School of Economics, Peking University, pkuliuchong@pku.edu.cn
Abstract
Many countries use place-based policies, such as regional tax breaks and/or subsidies, to
promote local economies. The place-based policy in this paper is the dispersed tax rate
that is offffered by local Chinese governments to attract fifirms. To explore the overall welfare
implication, we develop a general equilibrium model that features two agglomeration forces,
Marshallian externalities and input-output linkages. The model also includes other salient
factors that affffect heterogeneous fifirms’ location choices. After calibrating the model to
the Chinese data, we fifind that the status quo tax policy reduces the aggregate output by
1.51% relative to an alternative in which the central government imposed uniform tax rates
across regions and industries. Intuitively, a competitive tax policy leads to an ineffiffifficiently
dispersed production so that agglomeration benefifits are not fully realized. Failing to account
for agglomerative forces would underestimate the costs by 67%.
Keywords: Place-based policy, Agglomeration, Marshallian Externalities, Input-Output
linkage, General Equilibrium
JEL: F1; F4; R1; R5
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Agglomeration, Geographic Industry Distributions and Local Industry Policies.pdf
