We are grateful to participants for their comments and suggestions. In models of economic geography, plant-level scale economies and trade costs create incentives for spatial agglomeration of production into a manufacturing core and agricultural periphery, creating regional income differentials. We examine tax competition between national governments to influence the location of manufacturing activity. Labour is imperfectly mobile and governments impose redistributive taxes.
Regional integration is modeled as either increased labour mobility or lower trade costs.
We show that either type of integration may result in a decrease in the intensity of tax competition, and thus higher equilibrium taxes. Moreover, economic integration must increase taxes when the forces of agglomeration are the strongest. We hope that cures most problems. The Taiwan archive seems to be up to December 1998. Many thanks to those who have emailed me about problems with the paper delivery.