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Productive Public Expenditure in a New Economic Geography Model

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  • Pasquale Commendatore
  • Ingrid Kubin
  • Carmelo Petraglia

Abstract

This paper elaborates on Baldwin’s (1999) New Economic Geography model allowing for capital accumulation and capital mobility between a “rich” and a “poor” region. A central government decides upon the level and the regional and sectoral allocation of productivity enhancing public investments. We derive results on how such policies affect the overall private capital stock and its regional allocation under alternative financing schemes. We show that the regional and sectoral distribution of public capital matters in determining the final impact of an increase in public capital on the level of private capital. Furthermore, we find that increasing public capital in the “poor” region does not always increase the share of manufacturing in that region as the final result depends on the relative strength of two effects which have been studied separately in the literature so far: the “productivity” and the “demand” effects. Finally, we show that in order to be effective regional policy must not confine itself to the expenditure side but has to take into account the financing side at the same time.

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Bibliographic Info

Article provided by CEPII research center in its journal Economie Internationale.

Volume (Year): (2008)
Issue (Month): 114 ()
Pages: 133-160

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Handle: RePEc:cii:cepiei:2008-2te

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Keywords: New economic geography; public expenditure; footloose capital;

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References

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  1. Brulhart, Marius & Trionfetti, Federico, 2004. "Public expenditure, international specialisation and agglomeration," European Economic Review, Elsevier, vol. 48(4), pages 851-881, August.
  2. Brakman, Steven & Garretsen, Harry & Marrewijk, Charles van, 2002. "Locational competition and agglomeration: the role of government spending," CCSO Working Papers 200209, University of Groningen, CCSO Centre for Economic Research.
  3. Richard E. Baldwin & Paul Krugman, 2002. "Agglomeration, Integration and Tax Harmonization," NBER Working Papers 9290, National Bureau of Economic Research, Inc.
  4. Rikard Forslid & Gianmarco I.P. Ottaviano, 2003. "An analytically solvable core-periphery model," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 229-240, July.
  5. Pasquale Commendatore & Martin Currie & Ingrid Kubin, 2008. "Footloose Entrepreneurs, Taxes and Subsidies," Spatial Economic Analysis, Taylor & Francis Journals, vol. 3(1), pages 115-141.
  6. Commendatore, P. & Kubin, I., 2006. "Taxation on Agglomeration," CeNDEF Working Papers 06-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  7. Martin, Philippe & Ottaviano, Gianmarco Ireo Paolo, 1996. "Growing Locations: Industry Location in a Model of Endogenous Growth," CEPR Discussion Papers 1523, C.E.P.R. Discussion Papers.
  8. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  9. Rainald Borck & Michael Pflüger, 2004. "Agglomeration and Tax Competition," Discussion Papers of DIW Berlin 408, DIW Berlin, German Institute for Economic Research.
  10. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  11. Martin, Philippe, 1998. "Public Policies, Regional Inequalities and Growth," CEPR Discussion Papers 1841, C.E.P.R. Discussion Papers.
  12. Martin, Philippe & Ottaviano, Gianmarco Ireo Paolo, 1996. "Growth and Agglomeration," CEPR Discussion Papers 1529, C.E.P.R. Discussion Papers.
    • Martin, Philippe & Ottaviano, Gianmarco I P, 2001. "Growth and Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 947-68, November.
  13. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  14. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers.
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Cited by:
  1. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).
  2. Rhydian James & Peter Midmore & Dennis Thomas, 2012. "Public Sector Size and Peripherality," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(4), pages 447-460, December.

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