Does intermunicipal cooperation favor higher firm creation? French evidence from a natural experiment

This paper investigates whether the increasing cooperation between municipalities in the 2000s in France favored firm creation and what type of intermunicipal cooperation was more effective. Results first show that a higher share of municipalities involved in cooperation is a significant and positive driver of firm creation. Second, results indicate that to favor firm creation, intermunicipal governments must rely on business tax sharing. Our findings are in line with first and second-generation models of fiscal federalism. Indeed, the lower tax competition is probably key to make fiscal integration conducive to firm creation. And local governments are more likely to provide market-enhancing public goods when they face the relevant fiscal incentives. Finally, we suggest that the two goals of the 1999 law (increased cooperation between urban municipalities and business tax-based sharing) were effective in boosting firm creation in the 2000s.