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

Gruber, Stefan and Marattin, Luigi (2008): Taxation, infrastructure, and endogenous trade costs in New Economic Geography. Unpublished.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Economic Geography; Taxation; Endogenous Trade Costs; Infrastructure; Regional Policy
• Subjects: H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures; Other Public Investment and Capital Stock; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; R - Urban, Rural, and Regional Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade

References

Andersson F, Forslid R (2003) Tax Competition and Economic Geography. Journal of Public Economic Theory 5: 279-303

Arrow K, Kurtz M (1970) Public Investment, the Rate of Return and Optimal Fiscal Policy. John Hopkins University Press, Balltimore

Baldwin RE, Forslid R, Martin P, Ottaviano GIP, Robert-Nicoud F (2003) Economic Geography and Public Policy. Princeton University Press, Princeton

Barro R (1990) Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy 98: 103-125

Behrens K, Gaigné C (2006) Density (Dis)economies in Transportation: Revisiting the Core-Periphery Model. EconBulletin EB06R

Behrens K, Gaigné C, Ottaviano GIP, Thisse JF (2006) How Density Economies in International Transportation Link the Internal Geography of Trading Partners. Journal of Urban Economics 60: 248-263

Commission of the European Communities (1999) Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on Cohesion and Transport, COM (1998) 806. Brussels

Commission of the European Communities, Energy and Transport DG (2005) Trans-European Transport Network, TEN-T, Priority Axes and Projects 2005. Brussels

Dixit AK, Stiglitz JE (1977) Monopolistic Competition and Optimum Product Diversity. American Economic Review 67: 297-308

Duranton G, Storper M (2008) Agglomeration and Trade with Endogenous Transaction Costs. Canadian Journal of Economics 41: 292-319

Egger H, Falkinger J (2006) The Role of Public Infrastructure for Firm Location and International Outsourcing. European Economic Review 50: 1993-2015

Fan S, Zhang X (2004) Infrastructure and Regional Economic Development in China. China Economic Review 15: 203-214

Fujita M, Krugman P, Venables AJ (1999) The Spatial Economy - Cities, Regions, and International Trade. MIT Press, Cambridge (MA)

Henderson JV, Shalizi Z, Venables AJ (2001) Geography and Development. Journal of Economic Geography 1: 81-105

Kilkenny M (1998) Transport Costs and Rural Development. Journal of Regional Science 38: 293-312

Krugman P (1991a) Geography and Trade. Leuven University Press and Cambridge University Press, Leuven, Cambridge

Krugman P (1991b) Increasing Returns and Economic Geography. Journal of Political Economy 99: 483-499

Limao N, Venables AJ (1999) Infrastructure, Geographical Disadvantage, and Transport Costs. World Bank Economic Review 15: 451-479

Martin P, Rogers CA (1995) Industrial Location and Public Infrastructure. Journal of International Economics 39: 335-351

Mansori KS (2003) The Geographic Effects of Trade Liberalization with Increasing Returns in Transportation. Journal of Regional Science 43: 249-268

Mori T, Nishikimi K (2002) Economies of Transport Density and Industrial Agglomeration. Regional Science and Urban Economics 32: 167-200

Puga D (2002) European Regional Policies in the Light of Recent Location Theories. Journal of Economic Geography 2: 373-406