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Can Taxes Drive Agglomeration while approaching the Global Economy?

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  • Giovanni Peri
  • Luisa Lambertini

Abstract

In the transitional phase towards full economic integration, European countries have the possibility of re-shaping the continental geography of specialization. We develop a two-sector two-country model that shows formally how fiscal policy can be critical in promoting specialization in a phase where increasing returns are strong enough to sustain agglomeration but local barriers are too high for agglomeration to arise endogenously. We show that, in this intermediate phase, the optimal policy is to levy asymmetric taxes on the two sectors in order to induce agglomeration and therefore welfare benefits to both countries.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 157.

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Handle: RePEc:igi:igierp:157

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  1. Hans Jarle Kind & Helene Midelfart & Guttorm Schjelderup, 2000. "Competing for Capital in a "Lumpy" World," CESifo Working Paper Series 252, CESifo Group Munich.
  2. Mary Amiti, 1997. "Specialisation Patterns in Europe," CEP Discussion Papers dp0363, Centre for Economic Performance, LSE.
  3. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
  4. Richard E. Baldwin, 1999. "The Core-Periphery Model with Forward-Looking Expectations," NBER Working Papers 6921, National Bureau of Economic Research, Inc.
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