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Locational Competition and Agglomeration: The Role of Government Spending

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  • Steven Brakman
  • Harry Garretsen
  • Charles van Marrewijk

Abstract

With the completion of EMU, tax competition and, more in general, locational competition is high on the EU policy agenda. In contrast to the standard neo-classical reasoning, recent advances in the theory of trade and location have shown that tax competition does not necessarily lead to a ‘race to the bottom’. In these recent discussions the relevance of government spending as an instrument for locational competition is unduly neglected. We therefore introduce a more elaborate government sector in a geographical economics model by analyzing government spending and government production. By changing the relative size, direction or efficiency of the production of public goods, our simulation results show that governments can change the equilibrium between agglomerating and spreading forces. In addition, we show analytically that the introduction of public goods fosters agglomeration. Ultimately, our paper shows that by restricting attention to taxes, one ignores that government spending also determines the attractiveness of a country as a location for the mobile factors of production.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 775.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_775

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References

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  1. J.Peter Neary, 2001. "Of Hype and Hyperbolas: Introducing the New Economic Geography," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 536-561, June.
  2. Hans-Werner Sinn, 2004. "The New Systems Competition," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(1), pages 23-38, 02.
  3. Richard E. Baldwin & Paul Krugman, 2002. "Agglomeration, Integration and Tax Harmonization," NBER Working Papers 9290, National Bureau of Economic Research, Inc.
  4. Fredrik Andersson & Rikard Forslid, 2000. "Tax Competition and Economic Geography," Econometric Society World Congress 2000 Contributed Papers 1356, Econometric Society.
  5. Ottaviano, Gianmarco Ireo Paolo, 1996. "Monopolistic Competition, Trade, and Endogenous Spatial Fluctuations," CEPR Discussion Papers 1327, C.E.P.R. Discussion Papers.
  6. Hans-Werner Sinn, 1990. "Tax Harmonization and Tax Competition in Europe," NBER Working Papers 3248, National Bureau of Economic Research, Inc.
  7. Joeri Gorter & Ruud de Mooij, 2001. "Capital income taxation in Europe; trends and trade-offs," CPB Special Publication 30, CPB Netherlands Bureau for Economic Policy Analysis.
  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. 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. Egger, Hartmut & Falkinger, Josef, 2006. "The role of public infrastructure and subsidies for firm location and international outsourcing," European Economic Review, Elsevier, vol. 50(8), pages 1993-2015, November.
  2. Chatterjee, Santanu & Turnovsky, Stephen J., 2012. "Infrastructure and inequality," European Economic Review, Elsevier, vol. 56(8), pages 1730-1745.
  3. Lars P. Feld & Gebhard Kirchgässner & Christoph A. Schaltegger, 2004. "Fiscal Federalism and Economic Performance: Evidence from Swiss Cantons," Marburg Working Papers on Economics 200420, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Charles van Marrewijk, 2005. "Geographical Economics and the Role of Pollution on Location," Tinbergen Institute Discussion Papers 05-018/2, Tinbergen Institute.
  5. Kähler, Jürgen, 2009. "Die Messung der Agglomeration als latente Variable und ihr Einfluss auf Staatsausgaben," Forschungs- und Sitzungsberichte der ARL: Aufsätze, in: Öffentliche Finanzströme und räumliche Entwicklung, pages 239-264 Akademie für Raumforschung und Landesplanung (ARL) - Leibniz-Forum für Raumwissenschaften.
  6. Cornelius Bähr & Ulrike Stierle-von Schütz & Matthias Wrede, 2007. "Dezentralisierung in den EU-Staaten und räumliche Verteilung wirtschaftlicher Aktivitäten," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(2), pages 110-129, 03.
  7. Jürgen von Hagen, 2007. "Institutionelle Gestaltung föderaler Systeme: Theorie und Empirie," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(2), pages 109-109, 03.
  8. Stegarescu, Dan, 2004. "Economic Integration and Fiscal Decentralization: Evidence from OECD Countries," ZEW Discussion Papers 04-86, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Arcalean, Calin & Glomm, Gerhard & Schiopu, Ioana, 2012. "Growth effects of spatial redistribution policies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 988-1008.
  10. Pasquale Commendatore & Ingrid Kubin & Carmelo Petraglia, 2008. "Productive Public Expenditure in a New Economic Geography Model," Economie Internationale, CEPII research center, issue 114, pages 133-160.
  11. Christian Leßmann, 2006. "Fiscal Decentralization and Regional Disparity: A Panel Data Approach for OECD Countries," Ifo Working Paper Series Ifo Working Papers No. 25, Ifo Institute for Economic Research at the University of Munich.
  12. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2003. "Föderalismus, Dezentralität und Wirtschaftswachstum," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(3), pages 361-377.
  13. Michiel Gerritse, 2010. "Policy competition and agglomeration: a local government view," Working Papers 2010/31, Institut d'Economia de Barcelona (IEB).
  14. Koetter, Michael & Wedow, Michael, 2008. "Does regional redistribution spur growth?," Discussion Paper Series 1: Economic Studies 2008,28, Deutsche Bundesbank, Research Centre.
  15. Hartmut Egger & Josef Falkinger, 2003. "The Role of Public Infrastructure for Firm Location and International Outsourcing," CESifo Working Paper Series 970, CESifo Group Munich.
  16. Döring, Thomas, 2005. "Räumliche Externalitäten von Wissen und ihre Konsequenzen für die Ausgestaltung des Finanzausgleichs," Forschungs- und Sitzungsberichte der ARL: Aufsätze, in: Das föderative System in Deutschland: Bestandsaufnahme, Reformbedarf und Handlungsempfehlungen aus raumwissenschaftlicher Sicht, pages 93-120 Akademie für Raumforschung und Landesplanung (ARL) - Leibniz-Forum für Raumwissenschaften.
  17. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2004. "Federalism, Decentralization, and Economic Growth," Marburg Working Papers on Economics 200430, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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