Optimal Public Investment in Economic Centers and the Periphery

Martin Meurers () and Johannes Moenius

VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy from Verein für Socialpolitik / German Economic Association

Abstract: We analyze productivity enhancing public expenditure in a spatial economic model with labor mobility, firm-specific increasing returns to scale, and transport costs. Building on Krugman (1991), Fujita, Krugman and Venables (1999) and Redding (2016), we compare optimal investment and tax policies of fiscally autonomous regions to those of a benevolent central planer. We find transport costs and the size of scale effects to influence optimal tax and spending rates under both regimes. For sufficiently low transport costs and low substitutability between manufactured goods, regional fiscal autonomy leads to underinvestment: The lower the transport costs, the lower the local investment, and the higher the potential welfare gain through centralized policies. Our results challenge the view that local public goods should be financed entirely by local governments. They also help explain the recent decline of public investment at the municipal level in fiscally decentralized countries like Germany.

Keywords: quantitative spatial economics; public investment; fiscal federalism (search for similar items in EconPapers)
JEL-codes: H72 H77 R12 R53 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-geo, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc18:181579

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