Footloose capital and productive public services

We investigate the effect of public expenditure on the regional distribution of economic activity (firm location). We adopt a modified core–periphery framework, with capital being inter-regionally mobile, but earnings from capital accruing to immobile capital owners. Government provides public services and this has consequences on demand and supply: public services are financed through taxation (which impacts negatively on the consumption of manufactured goods), but they increase anufacturing firms’ productivity. Given the model’s assumptions, the overall effect of government activity depends on the regional distribution of the tax burden and several scenarios could merge; an interesting insight is that the benefits that laggard regions could receive from the provision of public services substantially increase if these are partially financed by the more prosperous economies.