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Modelling infrastructure and migration in a NEG model Luigi Marattin University of Bologna TERA FINAL CONFERENCE Ghent - 26 th August 2008. 1. THE NEG APPROACH 2. THE MODEL 3. RESULTS AND POLICY IMPLICATIONS. PRESENTATIONS PLAN. N ew E conomic G eography (Krugman 1991)
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University of Bologna
TERA FINAL CONFERENCE
Ghent - 26th August 2008
not so much why a particular industry ends up in a particular place, but rather why manufacturing activities in general end up in a “core” region(s), leaving the other (s) relatively underdeveloped (“periphery”).
INDUSTRIAL vs AGRICULTURAL regions
Heart of EU structural policy problem
DEGREES OF ECONOMIES OF SCALE (the higher it is, the higher the need for concentration so to exploit cost advantages)
TRANSPORT COSTS (the higher they are, the less incentive to concentration, since it is convenient to locate close to their final market)THREE FACTORS
Agricultural: perfect competition, constant returns to scale, homogenous good traded costlessly.
Manufacturing: monopolistic competition, increasing returns to scale, transport costs.
Labour force fixed in the short run, but responding to real wage movements in the long-run.
MICROFOUNDED OPTIMIZING BEHAVIOUR.THE FORMAL FRAMEWORK
1) the share of demand going to manufacturing
2) the elasticity of substitution / degree of economies to scale
3) transport costs
THEY ARE ALL EXOGENOUS.
Sooner or later we always bump into something exogenous, especially in economic modelling.
But number 3 is particularly unsatisfying, especially if coupled with the absence of public sector.
That is virtually the only empirical application of a (standard) theoretical NEG model.
Our attempt applies a more sophisticated model to six (regional or sub-regional) study areas.
Policy results should be handled rather carefully.THE NOVELTY AND A WARNING
Labour supply in the urban region: +5%
“ “ “ “ “ : +5% (intra)
“ “ “ “ “ : +15%
“ “ “ “ “ : +15% (intra)
Labour supply in the rural region: + 5%
“ “ “ “ “ : +15%
Structural parameters are calibrated as in Fingleton (2005) or as standard in related literature.
Results show the quantitative effects on:
1) Income differentials
2) Price differentials
3) Nominal wage differentials
4) Real wage differentials
We show only 1) and 4).
2) Competition effect: nominal wage is lower in the bigger region
3) Price index effect: prices are lower in the bigger region
(1) and (3) pushes towards divergence
(2) pushes towards convergece
OUR MODIFICATION (distorsionary taxation to finance infrastracture) MESSES EVERYTHING UP, TWICE.FORCES AT WORK
2) ITS REVENUE IS USED TO REDUCE TRANSPORT COSTS, WHICH IN TURN IS ANOTHER FORCE PUSHING TOWARDS CONVERGENCE/DIVERGENCE.
SO TRADITIONAL NEG RESULTS CAN BE SIGNIFICANTLY MODIFIED.WHY TWICE?
Income differentials reduce.
Net effects (NEG three traditional ones + distorsionary taxation) pushes towards divergence.POLICY IMPLICATIONS
Income differentials increase.
Net effects pushes towards convergence, but with a less extent.
HOW TO FINANCE INFRASTRACTURE BETWEEN URBAN AND RURAL REGION?
Tax the urban: income differential reduce, but push for divergence.
Tax the rural: income differential increase, but it is a help for convergence.
2) In the six study areas, we achieve qualitatively identical and quantitatively not-too-dissimilar results.
3) The choice of who bears the burden of infrastructure building is relevant for income differentials and convergence/divergence.
4) Effects on real wage differentialts must, in real life, be mitigated because simulations were run under the assumption that ALL tax revenue goes into infrastructure building.CONCLUSIONS