Working Paper: CEPR ID: DP10099
Authors: Julia Darby; Ben Ferrett; Ian Wooton
Abstract: We examine a trade model where three countries compete for an exogenous number of firms. In our hub-and-spoke framework, one country is the hub through which all trade with and between spokes takes place. We establish the distribution of industrial activity in the absence of taxes and compare it to the equilibrium when countries compete to attract firms. Even when all countries are the same size, the centrality of the hub sets it apart. We determine how this trading pattern matters, comparing it to a structure with direct trade between all countries. The implications of international tax competition are also examined.
Keywords: corporate taxes; devolution; hub and spoke; trade costs
JEL Codes: F15; F23; H25; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hub-and-spoke geography (R12) | distribution of industrial activity (L69) |
| trade costs (F19) | tax competition (H26) |
| tax competition (H26) | race to the bottom (L49) |
| trade costs (F19) | location of firms (R30) |
| hub (Y60) | higher taxes than spokes (H29) |
| reducing trade costs (F12) | exacerbates tax competition (H26) |
| reducing trade costs (F12) | greater concentration of firms in the hub (R32) |