The effects of public inputs, goods and services on households’ and firms’ location decision

Abstract

The aim of this dissertation is to contribute to the discussion on the effects of public inputs, goods and services (PIGS) on households’ and firms’ location decision. This work contributes to the debate providing greater insights on the empirical effects of PIGS on spatial mobility using detailed data for Germany. Chapter 2 assesses the short and long run impact of local grammar schools on employment in East German municipalities and finds evidence in favor of a 9% decrease in residential employment (those who work where they live) in locations with a low share of out-commuters and a reduction of house prices by 7% to 11% for all locations types if the only grammar school was closed. For the long-run since 1990, the empirical strategy estimates a 110% higher population and 70% higher house prices in municipalities with a grammar school in 2008 and high commuting costs. The effects in municipalities with low-commuting costs are 60% and 20% respectively. These results suggest that e.g. grammar schools, and thus public goods can play a substantial role for the spatial distribution of people and employment. More importantly, it demonstrates that increasing centralization of public goods in rural areas fortifies the trend in urbanization. Chapter 3 determines the effect of PIGS provision on firm foundation and location choices. Using data for West Germany it tests the implications of a theoretical model for firms’ location choice and identifies a negative effect of taxation and a positive effect of PIGS provision in the considered municipality. On top, the effect of an increase in neighbors tax rate and PIGS spending is positive supporting the notion of tax competition and spillover effects for PIGS between neighboring municipalities. Chapter 4 contributes to the previous chapter analyzing the sensitivity of firm foundations to changes in local taxation and PIGS provision when firms benefit from localization economies. While the former chapter depicts increasing attractiveness of locations with increasing provision of PIGS, an empirical setup shows that localization economies reduce the sensitivity of firm foundations to changes in location characteristics. The last chapter analyzes the impact of partisan politics on the local level in West Germany. Using three different estimation frameworks (Fixed Effects Regression, Regression Discontinuity Design and Instrumental Variable Regression) it does find evidence for mild partisan politics at best.