A note on tax competition, attachment to home, and underprovision of public goods

This paper analyzes efficiency in the provision of public goods when there is tax competition, but investors have attachment to home, i.e., a biased preference for investing in the region where they live. Investors are assumed to be heterogeneous in the costs to invest outside the home region. As a result, in comparison with the no attachment case, the capital outflow response to an increase in the tax rate is reduced because only investors facing small mobility costs will move capital out. In a symmetric equilibrium, tax rates are increased and the extent of the underprovision of public goods caused by tax competition is lessened. (c) 2005 Published by Elsevier Inc.