Optimal Public Investment in Economic Centers and the Periphery

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe 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.

Market Potential and Fiscal Incentives Influence Firms’ Location Decisions: Evidence From U.S. Counties

“…Our article fills the gap between the studies of agglomeration and market potential on firm-specific location decisions and studies that assess the impact of fiscal incentives. Following the model developed in Meurers and Moenius (2018), we investigate how market potential and fiscal incentives jointly determine firms’ location decisions. To do so, instead of individual firm’s location choice, we model the aggregate outcome of individual location choices.…”

“…In Meurers and Moenius (2018), a new economic geography model was developed based on the previous works of Fujita et al (2001), Krugman (1991), and Redding (2016). Instead of land, Meurers and Moenius used immobile labor as a locally fixed factor of production.…”

“…The terms of trade are computed by iteration. From the price equations in Meurers and Moenius (2018), it follows that P X / P M is a linear function of the ratio of market access ( M A ) to supplier access ( S A ; see also Redding & Venables, 2004):…”

“…We use the general equilibrium framework developed in Meurers and Moenius (2018) to guide our empirical analysis as we identify the relative importance of economic geography and fiscal incentives. We study the effect of local public investment and taxation on the net number of firms in manufacturing.…”

“…The article begins with a brief review of the literature and discusses previous empirical findings on the role of market potential and fiscal incentives on firm location. The next section derives the estimation equation from the model in Meurers and Moenius (2018), followed by a description of the data and the calculation of market potential and the adjusted number of firms. We then present the results and conclude with a discussion of policy implications.…”