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.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
1068.
Find related papers by JEL classification: H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies R12 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
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