No Taxation without Infrastructure

Stefan Gruber () and Luigi Marattin ()
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Stefan Gruber: University of Innsbruck, Austria and University of Bologna and The Rimini Center for Economic Analysis, Italy
Luigi Marattin: University of Bologna and University of Siena, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper presents a New Economic Geography model with distortionary taxation and endogenized transport costs. Tax revenues finance a public good, infrastructure. We show that the introduction of costly public investment in infrastructure leads to more pronounced agglomeration patterns. 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 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.

Keywords: New Economic Geography; Taxation; Endogenous Transport Costs; Infrastructure (search for similar items in EconPapers)
JEL-codes: F12 H25 H54 R12 (search for similar items in EconPapers)
Date: 2007-07
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:11_07

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