Abstract
Firm location and investment decisions are crucial for the economic prosperity of local communities. To that effect, local governments have a variety of policy tools at their disposal through which they can influence firms’ decisions in their location choices and investment decisions. Economic theory suggests, among others, that firms optimize in their investment decisions over location-specific tax costs, which reduce net profits, as well as over location-specific productive amenities, which increase productivity and expected profits. This project exploits a randomized information experiment among a representative survey of German firm managers to learn how firms perceive this optimization trade-off. Focusing on the question whether firms prefer better infrastructure access over low local corporate taxes, we first elicit respondents’ prior beliefs about the following local conditions in the municipality of the firm’s headquarter (i.e., the home municipality): the level of the local business tax rate, the share of German municipalities with a lower tax rate, the travel time to the next highway as well as the share of German municipalities with a lower travel time to the next highway than in the home municipality of the respondent firm, respectively. To make the inter-jurisdictional competition for firms via taxes and infrastructure at the local level in Germany equally salient to all of the respondents, we show a neutral introductory statement. Then, we randomly assign respondents to one of four experimental groups (one control group and three information-treatment groups). Treatment 1 informs about the actual share of German municipalities with a lower business tax rate, treatment 2 informs about the share of German municipalities with a lower travel time to the next highway, and treatment 3 informs about both types of findings (note that the information provided in all three treatments is truthful). A neutral control group does not receive information on any of these issues. After treatment administration, we first measure respondents’ perceived attractiveness of the locality in which the firm’s headquarters is located, which is our main outcome of interest. Second, we elicit investment plans of the respondents’ firms in their home municipality, neighboring municipalities, in other German municipalities or abroad. Third, respondents also state what business tax rate they think would be appropriate in their home municipality. Fourth, we also let respondents state their preference for further regional transfers to their home municipality. Fifth and last, respondents can also acquire information about the local business tax as well as local infrastructure access in a debriefing question. In our main analysis, we plan to estimate heterogeneous information-treatment effects by respondents’ prior beliefs. This will allow us to investigate the extent to which firm manager’s beliefs about the relative position of their home municipality in the domain of local business taxation and infrastructure access with respect to other German localities affect their perception of the location attractiveness of their home municipality. We also test whether these perceptions lead to changes in stated investment plans of firm managers across different sets of possible locations. Moreover, the information about both locational factors in the treatment 3 allows us to test whether infrastructure access is more important than low taxes (or vice versa).