The Public Sector and Core-Periphery Models

In this paper, we present an extension to Krugman's core-periphery model-namely, the introduction of the public sector as a new economic agent. There are two main results: first, we demonstrate theoretically that regions with a lower tax-burden in net terms, in the sense of having lower taxes and/or higher levels of public efficiency in their management, offer greater incentives to attract economic activity; secondly, the influence of the transport costs on the equilibria is not monotonous, as under the original approach, but now depends on its size, reflecting a strong interdependence between all the parameters of the model.