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Taxation, infrastructure and endogenous trade costs in new economic geography

Stefan Gruber and Luigi Marattin

Papers in Regional Science, 2010, vol. 89, issue 1, 203-222

Abstract: Abstract 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. Resumen Este artículo presenta un modelo de nueva geografía económica con tributación distorsionadora y costos de comercio endógenos. La recaudación de impuestos financia una buena infraestructura pública. Mostramos que la introducción de inversión pública costosa en infraestructura incrementa las tendencias aglomeradoras. Con respecto al tamaño de las regiones, el índice de precios de bienes manufacturados disminuye en la periferia, mientras que para el núcleo el índice de precios es bastante elevado, ya que domina el efecto distorsionador de los impuestos. “Viajar de gorra”– o, en términos de política regional, la inversión en infraestructuras financiada externamente – es beneficioso para la periferia, la cual puede asignar toda su recaudación de impuestos a apoyar la demanda local, generando un efecto de mercado local positivo que impulsa el proceso de recuperación.

Date: 2010
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Citations: View citations in EconPapers (3)

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https://doi.org/10.1111/j.1435-5957.2009.00256.x

Related works:
Working Paper: Taxation, Infrastructure, and Endogenous Trade Costs in New Economic Geography (2009) Downloads
Working Paper: Taxation, infrastructure, and endogenous trade costs in New Economic Geography (2008) Downloads
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