Fiscal Competition, Convergence and Agglomeration
34 Pages Posted: 13 Sep 2007
Date Written: August 2007
Abstract
This paper analyzes the impact of fiscal competition through infrastructure in a New Economic Geography framework. It is shown that regional competition leads to convergence if the trade costs are high but induces divergence if trade cost have fallen below a certain value. Moreover, fiscal competition yields an overprovision if the trade costs are sizable while it leads to underprovision if the regions are highly integrated. Finally, a trade-off between regional convergence and efficiency arises since the efficient distribution of regional infrastructure requires full agglomeration for sufficiently low trade costs.
Keywords: fiscal competition, infrastructure, agglomeration
JEL Classification: F12, F15, H87, R12
Suggested Citation: Suggested Citation
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