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Taxation, Infrastructure, and Endogenous Trade Costs in New Economic Geography

  • S. Gruber
  • L. 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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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 668.

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Date of creation: Apr 2009
Date of revision:
Handle: RePEc:bol:bodewp:668
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  1. Fan, Shenggen & Zhang, Xiaobo, 2004. "Infrastructure and regional economic development in rural China," China Economic Review, Elsevier, vol. 15(2), pages 203-214.
  2. Kilkenny, Maureen, 1998. "Transport Costs and Rural Development," Staff General Research Papers 1185, Iowa State University, Department of Economics.
  3. 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.
  4. 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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  6. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  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. Kilkenny, Maureen, 1998. "Transport Costs, the New Economic Geography, and Rural Development," Staff General Research Papers 1201, Iowa State University, Department of Economics.
  9. Forslid, Rikard & Andersson, Fredrik, 1999. "Tax Competition and Economic Geography," Research Papers in Economics 2000:5, Stockholm University, Department of Economics.
  10. Kashif S. Mansori, 2003. "The Geographic Effects of Trade Liberalization with Increasing Returns in Transportation," Journal of Regional Science, Wiley Blackwell, vol. 43(2), pages 249-268.
  11. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  12. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  13. Puga, Diego, 2001. "European Regional Policies in Light of Recent Location Theories," CEPR Discussion Papers 2767, C.E.P.R. Discussion Papers.
  14. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  15. V. Filipe MARTINS-DA-ROCHA & YIANNIS VAILAKIS, 2008. "Endogenous Transaction Costs," Discussion Papers 0810, Exeter University, Department of Economics.
  16. 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.
  17. BEHRENS, Kristian & GAIGNE, Carl & OTTAVIANO, Gianmarco I.P. & THISSE, Jacques-François, . "How density economies in international transportation link the internal geography of trading partners," CORE Discussion Papers RP 1870, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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