Firms localisation and sorting depending on the different local tax schemes

This paper analyses the effect of local taxation and local public goods on the localization and the sorting of freely mobile firms. Firms use two production factors: capital and labour. A local public good can be used as a partial substitute for capital. We consider a production function la Cobb-Douglas, the parameters of which differ from one firm to another. Local public goods are financed through two different local corporate taxation schemes that are simultaneously considered: a tax based on the capital asset value and a tax on benefit. We find that firms will self-sort themselves with respect to a parameter that is close to the capital intensity. Among firms with the same returns to scale, the more capitalistic a firm is, the more willing it will be to set in a jurisdiction with a high tax rate and an important amount of public good