Fredrik Gallo ()
Fredrik Gallo: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Abstract: We analyse the political determination of transportation costs in an analytically solvable core-periphery model. In a benchmark case with certainty about where agglomeration takes place, we find that a majority of voters prefers low trade costs and the resulting equilibrium is an industrialised core and a de-industrialised periphery. Allowing for uncertainty we show that a high trade cost candidate, that guarantees the initial symmetric equilibrium, may defeat the core-periphery equilibrium candidate. The reason is that a coalition of risk-averse immobile factors of production votes for status quo due to uncertainty about which region that will attract industrial activity.
37 pages, May 31, 2005
Note: This paper has been replaced by WP 2006:22 "Resisting Economic Integration when Industry Location is Uncertain"
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