Public Input Provision, Tax Base Mobility, and External Ownership

Abstract

This article investigates the distortionary impacts of tax base mobility and external ownership on public input provision. Regional governments compete for mobile tax bases (e.g., business capital). The impact of regional public policy partially accrues to non-residents because immobile factors (e.g., business land) are subject to external ownership. This article derives an optimal rule for regional public input provision that illustrates how these two distortionary impacts depend on the nature of production functions. The impact of external ownership is particularly complex. To explore this impact in detail, the case of production functions with constant elasticity of substitution is examined. Public inputs with different productivity impacts yield fairly different implications of external ownership for inefficient public input provision.