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Economic Geography and the Fiscal Effects of Regional Integration

  • Ludema, Rodney D
  • Wooton, Ian

In models of economic geography, plant-level scale economies and trade costs create incentives for spatial agglomeration of production into a manufacturing core and agricultural periphery, creating regional income differentials. We examine tax competition between national governments to influence the location of manufacturing activity. Labour is imperfectly mobile and governments impose redistributive taxes. Regional integration is modelled as either increased labour mobility or lower trade costs. We show that either type of integration may result in a decrease in the intensity of tax competition, and thus higher equilibrium taxes. Moreover, economic integration must increase taxes when the forces of agglomeration are the strongest.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1822.

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Date of creation: Mar 1998
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Handle: RePEc:cpr:ceprdp:1822
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  1. Kirchgassner, Gebhard & Pommerehne, Werner W., 1996. "Tax harmonization and tax competition in the European Union: Lessons from Switzerland," Journal of Public Economics, Elsevier, vol. 60(3), pages 351-371, June.
  2. WILDASIN, David, . "Nash equilibria in models of fiscal competition," CORE Discussion Papers RP -804, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Persson, Torsten & Tabellini, Guido, 1991. "The Politics of 1992: Fiscal Policy and European Integration," CEPR Discussion Papers 501, C.E.P.R. Discussion Papers.
  4. Wilson, John Douglas, 1987. "Trade, Capital Mobility, and Tax Competition," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 835-56, August.
  5. Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," NBER Working Papers 5098, National Bureau of Economic Research, Inc.
  6. Ludema, Rodney D & Wooton, Ian, 1997. "Regional Integration, Trade, and Migration: Are Demand Linkages Relevant in Europe?," CEPR Discussion Papers 1656, C.E.P.R. Discussion Papers.
  7. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  10. Mansoorian, Arman & Myers, Gordon M., 1993. "Attachment to home and efficient purchases of population in a fiscal externality economy," Journal of Public Economics, Elsevier, vol. 52(1), pages 117-132, August.
  11. Krugman, Paul, 1993. "On the number and location of cities," European Economic Review, Elsevier, vol. 37(2-3), pages 293-298, April.
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