Small scale economic differentiation : a multi-level analysis with indirect closure : 51st Congress of the European Regional Science Association (ERSA), 2011, Barcelona

We want to isolate systematically differing small-scale agglomeration-patterns, which indicate different types of competition between localities. We apply a technique of indirect closure based on the differing observed relation between local business tax-rate and tax-revenue and use a mixed multi-level model in order to cope with local dependencies on different scales. Thereby it is shown that small-scale agglomeration effects, i.e. differing development potentials of similar municipalities, are at least partially determined by settlement characteristics, geographical relative position and industry structure. Since these influences interact in various ways the observed patterns are very complex. It is due to small-scale "agglomeration-effects", defined here as a positive observed relation between tax-rate and tax-revenue, that municipalities of the same type may nevertheless have different potentials in economic development. On the other hand, a high mobility of firms in a dynamic environment strengthens the competition-effect as indicated by a negative relation between tax-rate and tax-revenue. Under such circumstances municipalities will strive for convergence. In empirical studies comparing regional developments on various geographical scales these heterogeneous relations will have to be taken into account in order to reach generalisable conclusions. we also conclude that regional economic policy cannot apply identical concepts independently of the wider economic environment. Instead it has to react to the differing endogenous potentials of localities for economic development.