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Taxation, infrastructure, and endogenous trade costs in New Economic Geography

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  • Gruber, Stefan
  • Marattin, Luigi

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1068.

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Date of creation: 09 Jul 2008
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Handle: RePEc:pra:mprapa:1068

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Keywords: New Economic Geography; Taxation; Endogenous Trade Costs; Infrastructure; Regional Policy;

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  1. Henderson, J. Vernon & Shalizi, Zmarak & Venables, Anthony J., 2000. "Geography and development," Policy Research Working Paper Series 2456, The World Bank.
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  12. 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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  17. 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.
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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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