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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
Date of revision:
Handle: RePEc:bol:bodewp:668
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  1. Fredrik Andersson & Rikard Forslid, 2003. "Tax Competition and Economic Geography," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 279-303, 04.
  2. Maureen Kilkenny, 1995. "Transport Costs and Rural Development," Center for Agricultural and Rural Development (CARD) Publications 95-wp133, Center for Agricultural and Rural Development (CARD) at Iowa State University.
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  4. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  5. 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.
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  7. 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).
  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
  11. Kilkenny, Maureen, 1998. "Transport Costs, the New Economic Geography, and Rural Development," Staff General Research Papers 1201, Iowa State University, Department of Economics.
  12. Puga, Diego, 2001. "European Regional Policies in Light of Recent Location Theories," CEPR Discussion Papers 2767, C.E.P.R. Discussion Papers.
  13. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  14. 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.
  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. Fan, Shenggen & Zhang, Xiaobo, 2004. "Infrastructure and regional economic development in rural China," China Economic Review, Elsevier, vol. 15(2), pages 203-214.
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