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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.

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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
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Handle: RePEc:bol:bodewp:668
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  1. Fredrik Andersson & Rikard Forslid, 2000. "Tax Competition and Economic Geography," Econometric Society World Congress 2000 Contributed Papers 1356, Econometric Society.
  2. Martins-da-Rocha, Victor Filipe & Vailakis, Yiannis, 2008. "Endogenous Transaction Costs," Economics Working Papers (Ensaios Economicos da EPGE) 680, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  3. Duranton, Gilles & Storper, Michael, 2005. "Rising Trade Costs? Agglomeration and Trade with Endogenous Transaction Costs," CEPR Discussion Papers 4933, C.E.P.R. Discussion Papers.
  4. 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.
  5. 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.
  6. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  7. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  8. Kilkenny, Maureen, 1998. "Transport Costs and Rural Development," Staff General Research Papers 1185, Iowa State University, Department of Economics.
  9. 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).
  10. Henderson, J. Vernon & Shalizi, Zmarak & Venables, Anthony J., 2000. "Geography and development," Policy Research Working Paper Series 2456, The World Bank.
  11. Puga, Diego, 2001. "European Regional Policies in Light of Recent Location Theories," CEPR Discussion Papers 2767, C.E.P.R. Discussion Papers.
  12. Fan, Shenggen & Zhang, Xiaobo, 2004. "Infrastructure and regional economic development in rural China," China Economic Review, Elsevier, vol. 15(2), pages 203-214.
  13. Kilkenny, Maureen, 1998. "Transport Costs, the New Economic Geography, and Rural Development," Staff General Research Papers 1201, Iowa State University, Department of Economics.
  14. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  15. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  16. repec:ebl:ecbull:v:18:y:2006:i:5:p:1-7 is not listed on IDEAS
  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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