Theory and Empirics
Edited by Neri Salvadori, Pasquale Commendatore and Massimo Tamberi
Chapter 1: Footloose Capital and Productive Public Services
Pasquale Commendatore, Ingrid Kubin and Carmelo Petraglia 1.1. INTRODUCTION According to Brakman et al. (2005), European Cohesion Policy is inconsistent since it sometimes seems to target agglomerations of industrial activities in core regions, but more often stimulates their relocation in the periphery. Such a criticism provides a motivation to analyse policy issues in New Economic Geography (NEG) models, which mainly focus on the determinants of the spatial location of the manufacturing industry.1 However, incorporation of public expenditure in NEG models represents a very recent theoretical advance. Providing a full picture of the working of both agglomeration and dispersion forces induced by policy measures to make backward regions more attractive to investors might be helpful to design effective policies promoting a sustained catch-up process across EU regions. The impact of public expenditure on the location decisions of firms has been studied within a few variants of NEG models.2 In particular, in a companion paper (Commendatore et al., 2008), we consider a two-region Constructed Capital (CC) model, that is a Footloose Capital (FC) model with the additional feature of creation and destruction/depreciation of capital goods. In that paper our main focus was on industrial location and welfare effects of productive public services provision under the assumption of endogenous capital. The government uses tax revenues to purchase capital goods to use in the production of freely available public services. Hence, public policy can affect production in the manufacturing sector via its impact on factor productivity. We show in that paper that the interplay...
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