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Taxation, infrastructure and endogenous trade costs in new economic geography

  • Stefan Gruber
  • Luigi Marattin

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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Article provided by Wiley Blackwell in its journal Papers in Regional Science.

Volume (Year): 89 (2010)
Issue (Month): 1 (03)
Pages: 203-222

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Handle: RePEc:bla:presci:v:89:y:2010:i:1:p:203-222
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=1056-8190

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  1. Andersson, Fredrik & Forslid, Rikard, 1999. "Tax Competition and Economic Geography," CEPR Discussion Papers 2220, C.E.P.R. Discussion Papers.
  2. Kilkenny, Maureen, 2003. "Transport Costs and Rural Development," Staff General Research Papers 10309, Iowa State University, Department of Economics.
  3. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  4. Gilles Duranton & Michael Storper, 2005. "Rising trade costs?: agglomeration and trade with endogenous transaction costs," LSE Research Online Documents on Economics 19898, London School of Economics and Political Science, LSE Library.
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  7. J. Vernon Henderson, Zmarak Shalizi, and Anthony J. Venables, 2001. "Geography and development," Journal of Economic Geography, Oxford University Press, vol. 1(1), pages 81-105, January.
  8. Fan, Shenggen & Zhang, Xiaobo, 2004. "Infrastructure and regional economic development in rural China," China Economic Review, Elsevier, vol. 15(2), pages 203-214.
  9. Puga, Diego, 2001. "European Regional Policies in Light of Recent Location Theories," CEPR Discussion Papers 2767, C.E.P.R. Discussion Papers.
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  11. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  12. Kilkenny, Maureen, 1998. "Transport Costs, the New Economic Geography, and Rural Development," Staff General Research Papers 1201, Iowa State University, Department of Economics.
  13. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  14. V. Filipe MARTINS-DA-ROCHA & YIANNIS VAILAKIS, 2008. "Endogenous Transaction Costs," Discussion Papers 0810, Exeter University, Department of Economics.
  15. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  16. 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.
  17. 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.
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