A recent IZA discussion paper by Sebastian Blesse, Florian Buhlmann, Philipp Heil, Davud Rostam-Afschar shows that firms’ perceptions of their location’s competitiveness shape satisfaction and investment plans–and that these perceptions are often inaccurate. Surveying executives in Germany, the authors find that many firms overrate the competitiveness of their municipality compared to others.
An experiment providing municipality-specific information corrects these misperceptions: firms receiving negative feedback about their local tax or infrastructure conditions reduce their satisfaction with the location. Yet, despite this, most still prefer to invest locally, suggesting a strong home bias. Reactions to information vary. Firms with high location flexibility respond strongly to positive tax news by reducing planned investments in other municipalities. Information about local tax burdens has a greater effect on investment plans than information on infrastructure, such as highway access. These findings carry important implications for local economic policy and our understanding of firm location decisions.
Methodology
The study uses a survey experiment embedded in the German Business Panel (GBP), with over 3,000 randomly selected firm managers. Participants first rated the perceived efficiency of public spending and estimated their local business tax rate and average distance to the nearest highway. They also guessed how their municipality ranked nationally in both aspects. Firms were then randomly assigned to one of four groups: a control group, and three treatment groups receiving information about the actual tax ranking (TAXATION), highway access (INFRASTRUCTURE), or both (TAXATION-INFRASTRUCTURE). After receiving this data, firms rated their satisfaction with their location and their likelihood of investing locally or elsewhere.
Findings
Firms Misjudge Competitiveness: Firms are fairly accurate in estimating their absolute tax burden and highway distance, but they systematically overrate their municipality’s competitiveness. On average, they overestimate tax competitiveness by 28 percentage points. Nearly 80% believe their tax position is better than it is, and similar patterns appear for infrastructure. This indicates substantial misperceptions in comparative assessments.
Information Affects Perception, But Not Always Behavior: Providing accurate information significantly changes how firms assess their location–but not always in the same way. Firms receiving negative news on taxes or infrastructure reduce their satisfaction, while those receiving positive news show little change. In infrastructure, satisfaction only drops if firms had overestimated their access; it remains stable otherwise.
Tax News Influences Investment Plans: Tax information affects investment plans more than infrastructure information. Firms that learn their municipality is more tax competitive are less likely to invest elsewhere. Those receiving negative tax news are more likely to consider investing outside their current location. These effects are statistically significant when comparing over- and under-estimators, though not always in comparisons across all groups. In contrast, learning about infrastructure conditions–whether positive or negative–has no significant impact on investment decisions. This may indicate that firms assume a basic infrastructure level or place more weight on tax conditions in short-term planning.
Heterogeneous Effects: Responses vary across firms. Firms in more mobile sectors adjust investment plans more strongly when receiving positive tax news. Corporations are more responsive than partnerships, likely because partnerships can partially offset business tax against income tax. Interestingly, when firms receive both tax and infrastructure information, responses are muted–perhaps reflecting a view that taxes are a price for local infrastructure.
Key Takeaways
Despite being informed of less favorable conditions, most firms still prefer to invest at their current location. This home bias may reflect high adjustment costs, such as relocating skilled labor or breaking local networks. Uncertainty about alternative locations could also play a role. Overall, the study highlights that firms often misperceive the competitiveness of their location, particularly in tax and infrastructure comparisons. These misperceptions influence satisfaction and, in some cases, investment decisions. Addressing information gaps through targeted communication could be a valuable tool in local economic policy.