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Taxation, infrastructure, and endogenous trade costs in New Economic Geography


  • Gruber, Stefan
  • Marattin, Luigi


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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  • Gruber, Stefan & Marattin, Luigi, 2008. "Taxation, infrastructure, and endogenous trade costs in New Economic Geography," MPRA Paper 1068, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:1068

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    Cited by:

    1. Mark D. Partridge, 2010. "The duelling models: NEG vs amenity migration in explaining US engines of growth," Papers in Regional Science, Wiley Blackwell, vol. 89(3), pages 513-536, August.
    2. Stefan Gruber, 2010. "To Migrate or to Commute?," Review of Economic Analysis, Rimini Centre for Economic Analysis, vol. 2(1), pages 110-134, January.

    More about this item


    New Economic Geography; Taxation; Endogenous Trade Costs; Infrastructure; Regional Policy;

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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