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.