Fiscal Competition, Convergence and Agglomeration

34 Pages Posted: 13 Sep 2007

See all articles by Robert Fenge

Robert Fenge

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Ifo Institute for Economic Research at the University of Munich

Maximilian von Ehrlich

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES)

Matthias Wrede

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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

Fenge, Robert and von Ehrlich, Maximilian and Wrede, Matthias, Fiscal Competition, Convergence and Agglomeration (August 2007). CESifo Working Paper Series No. 2084, Available at SSRN: https://ssrn.com/abstract=1014017 or http://dx.doi.org/10.2139/ssrn.1014017

Robert Fenge (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschingerstr. 5
81679 Munich
Germany

Ifo Institute for Economic Research at the University of Munich ( email )

Poschingerstr. 5
Munich
Germany

Maximilian Von Ehrlich

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, 80539
Germany

Matthias Wrede

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Institute of Economics ( email )

Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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