Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?

Recent theoretical work in economic geography has shown that agglomeration forces can mitigaterace-to-the-bottom tax competition, by partly or fully offsetting firms sensitivity to tax differentials.We test this proposition using data on firm births across Swiss municipalities. We find that corporatetaxes deter firm births less in more spatially concentrated sectors. Firms in sectors with an agglomerationintensity in the top quintile are less than half as responsive to differences in corporate taxburdens as firms in sectors with an agglomeration intensity in the bottom quintile. Hence,agglomeration economies do appear to attenuate the impact of tax differentials on firms locationchoices.