Vertical fiscal transfers and the location of footloose activity across a country regions

Abstract

Extending Martin and Rogers’ FCM including non-tradable goods and public employment we analyse the effect on economic activity location that follows to changes on the regional distribution of transfers. An increase in the share of transfers a region receives positively affects the production of manufactures the higher are: transaction costs of goods produced under increasing returns to scale; the share of transfers that goes directly to consumers instead of local governments; the elasticity of substitution between differentiated goods; the share of consumers’ expenditure on manufactures via-as-vis on non-traded goods.