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Taxation, Infrastructure, and Endogenous Trade Costs in New Economic Geography

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  • S. Gruber
  • L. 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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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 668.

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Date of creation: Apr 2009
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Handle: RePEc:bol:bodewp:668

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  1. Maureen Kilkenny, 1995. "Transport Costs and Rural Development," Center for Agricultural and Rural Development (CARD) Publications 95-wp133, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. Egger, Hartmut & Falkinger, Josef, 2006. "The role of public infrastructure and subsidies for firm location and international outsourcing," European Economic Review, Elsevier, Elsevier, vol. 50(8), pages 1993-2015, November.
  3. Martins-da-Rocha, Victor Filipe & Vailakis, Yiannis, 2008. "Endogenous Transaction Costs," Economics Working Papers (Ensaios Economicos da EPGE) 680, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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  6. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  7. Gilles Duranton & Michael Storper, 2005. "Rising trade costs?: agglomeration and trade with endogenous transaction costs," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19898, London School of Economics and Political Science, LSE Library.
  8. Kilkenny, Maureen, 1998. "Transport Costs, the New Economic Geography, and Rural Development," Staff General Research Papers 1201, Iowa State University, Department of Economics.
  9. Fredrik Andersson & Rikard Forslid, 2000. "Tax Competition and Economic Geography," Econometric Society World Congress 2000 Contributed Papers 1356, Econometric Society.
  10. Fan, Shenggen & Zhang, Xiaobo, 2004. "Infrastructure and regional economic development in rural China," China Economic Review, Elsevier, Elsevier, vol. 15(2), pages 203-214.
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  12. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  13. Kristian Behrens & Carl Gaigné & Gianmarco I.P. Ottaviano & Jacques-François Thisse, 2006. "How density economies in international transportation link the internal geography of trading partners," Working Papers 9904, Institut National de la Recherche Agronomique, France.
  14. Henderson, J. Vernon & Shalizi, Zmarak & Venables, Anthony J., 2000. "Geography and development," Policy Research Working Paper Series 2456, The World Bank.
  15. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
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  17. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
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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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