Economic Development and Agglomeration: Research Activity and Tax Competition in a Static Equilibrium Model

The paper outlines a static equilibrium model, which analyses the economic development in a two-country case by considering international migration in R&D-sectors. The effects of migration and firm decisions on both industrial agglomeration and economic development will be shown: lock-in-effects and free market entry will lead to a concentration of firms. In addition, the consideration of fundamental and secondary research activity leads to a higher number of firms and products by means of cost reduction and spillover effects. The resulting demand of unskilled and skilled labor will be met by sectoral and international migration. This reinforces the concentration of economic activity and yields to a higher degree of specialization and economic development. Furthermore, strategic income taxation enables governments to foster industrial agglomeration and to promote national research activity. Hence, countries face international tax competition while competing for skilled labor.