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Productive Public Expenditure in a New Economic Geography Model

  • Pasquale Commendatore
  • Ingrid Kubin
  • Carmelo Petraglia

This paper elaborates on Baldwin’s (1999) New Economic Geography model allowing for capital accumulation and capital mobility between a “rich” and a “poor” region. A central government decides upon the level and the regional and sectoral allocation of productivity enhancing public investments. We derive results on how such policies affect the overall private capital stock and its regional allocation under alternative financing schemes. We show that the regional and sectoral distribution of public capital matters in determining the final impact of an increase in public capital on the level of private capital. Furthermore, we find that increasing public capital in the “poor” region does not always increase the share of manufacturing in that region as the final result depends on the relative strength of two effects which have been studied separately in the literature so far: the “productivity” and the “demand” effects. Finally, we show that in order to be effective regional policy must not confine itself to the expenditure side but has to take into account the financing side at the same time.

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Article provided by CEPII research center in its journal Economie Internationale.

Volume (Year): (2008)
Issue (Month): 114 ()
Pages: 133-160

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Handle: RePEc:cii:cepiei:2008-2te
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  1. Borck, Rainald & Pfluger, Michael, 2006. "Agglomeration and tax competition," European Economic Review, Elsevier, vol. 50(3), pages 647-668, April.
  2. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  3. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers.
  4. Pasquale Commendatore & Martin Currie & Ingrid Kubin, 2005. "Footloose Entrepreneurs, Taxes and Subsidies," The School of Economics Discussion Paper Series 0521, Economics, The University of Manchester.
  5. Martin, Philippe & Ottaviano, Gianmarco, 1996. "Growth and Agglomeration," CEPR Discussion Papers 1529, C.E.P.R. Discussion Papers.
    • Martin, Philippe & Ottaviano, Gianmarco I P, 2001. "Growth and Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 947-68, November.
  6. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  7. Martin, Philippe & Ottaviano, Gianmarco, 1996. "Growing Locations: Industry Location in a Model of Endogenous Growth," CEPR Discussion Papers 1523, C.E.P.R. Discussion Papers.
  8. Martin, Philippe, 1999. "Public policies, regional inequalities and growth," Journal of Public Economics, Elsevier, vol. 73(1), pages 85-105, July.
  9. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  10. Brulhart, Marius & Trionfetti, Federico, 2004. "Public expenditure, international specialisation and agglomeration," European Economic Review, Elsevier, vol. 48(4), pages 851-881, August.
  11. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  12. repec:dgr:rugsom:02c75 is not listed on IDEAS
  13. Rikard Forslid & Gianmarco I.P. Ottaviano, 2003. "An analytically solvable core-periphery model," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 229-240, July.
  14. Commendatore, P. & Kubin, I., 2006. "Taxation on Agglomeration," CeNDEF Working Papers 06-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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