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Taxation, infrastructure and endogenous trade costs in new economic geography

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  • Stefan Gruber
  • Luigi Marattin

Abstract

This paper presents a new economic geography model with distortionary taxation and endogenized trade costs. Tax revenues finance a public good, infrastructure. We show that the introduction of costly public investment in infrastructure increases agglomerative tendencies. With respect to the regions' sizes, in the periphery, the price index for manufacturing goods decreases, whereas for the core, the price index is rather high since the distortionary effect of taxes dominates. 'Free riding'- or, in terms of regional policy, externally funded infrastructure investment - is beneficial for the periphery, which can devote all its tax revenue to local demand support, generating a positive home market effect and driving the catch up process. Copyright (c) 2009 the author(s). Journal compilation (c) 2009 RSAI.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Papers in Regional Science.

Volume (Year): 89 (2010)
Issue (Month): 1 (03)
Pages: 203-222

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Handle: RePEc:bla:presci:v:89:y:2010:i:1:p:203-222

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1056-8190

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Cited by:
  1. Stefan Gruber, 2010. "To Migrate or to Commute?," Review of Economic Analysis, Rimini Centre for Economic Analysis, Rimini Centre for Economic Analysis, vol. 2(1), pages 110-134, January.

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