Working Paper: CEPR ID: DP1841
Authors: Philippe Martin
Abstract: This paper constructs a two-region endogenous growth model, where economic geography and public infrastructures play a key role. The model allows us to analyse the contribution of different types of redistributive public policies on growth, industrial geography and spatial income distribution. An improvement of infrastructures that helps decrease transaction costs inside the richest region increases spatial concentration of industries, increases the growth rate, and decreases the gap in income between the two regions. An improvement in infrastructure in the poor region has the exact reverse effect. In this sense, the paper highlights a non-trivial political trade-off between growth and spatial distribution of economic activities. Contrary to transfers and traditional regional policies, it is shown that a public policy that reduces the cost of innovation can attain the objectives of higher growth and more even spatial distribution of incomes and economic activities. From that point of view, these policies seem preferable to the regional policies that are now implemented in Europe.
Keywords: growth; geography; infrastructure; public policies; innovation
JEL Codes: 040; R12; R58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improvement in infrastructure within wealthier regions (R11) | Increased spatial concentration of industries (R32) |
| Increased spatial concentration of industries (R32) | Increased growth rate (O42) |
| Increased growth rate (O42) | Reduced income disparities between regions (R11) |
| Improvement in infrastructure in poorer regions (O18) | Decrease in growth rates (O49) |
| Improvement in infrastructure in poorer regions (O18) | Exacerbation of income inequalities (D31) |
| Public policies aimed at reducing the cost of innovation (O38) | Higher growth (O49) |
| Public policies aimed at reducing the cost of innovation (O38) | More equitable income distribution (D31) |
| Traditional regional policies (R58) | Less efficient economic geography (R12) |
| Traditional regional policies (R58) | Greater income inequality (D31) |