Taxation, Infrastructure, and Endogenous Trade Costs in New Economic Geography

Stefan Gruber and Luigi Marattin

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

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.

Date: 2009-04
New Economics Papers: this item is included in nep-int
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Related works:
Journal Article: Taxation, infrastructure and endogenous trade costs in new economic geography (2010)
Working Paper: Taxation, infrastructure, and endogenous trade costs in New Economic Geography (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:668

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