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

Stefan Gruber and Luigi Marattin

MPRA Paper from University Library of Munich, Germany

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.

Keywords: New Economic Geography; Taxation; Endogenous Trade Costs; Infrastructure; Regional Policy (search for similar items in EconPapers)
JEL-codes: F12 H25 H54 R12 (search for similar items in EconPapers)
Date: 2008-07-09
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc

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Related works:
Journal Article: Taxation, infrastructure and endogenous trade costs in new economic geography (2010) Downloads
Working Paper: Taxation, Infrastructure, and Endogenous Trade Costs in New Economic Geography (2009) Downloads
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