The effects of vertical fiscal transfers on the location of economic activity across a country regions: theory and evidence for Argentina

PEDRO E. MONCARZ; SEBASTIAN FREILLE; MARCELO CAPELLO; ALBERTO FIGUERAS

Medellín

Congreso; XV Annual Meeting of Latin America and Caribbean Economic Association; 2010

Latin America and Caribbean Economic Association (LACEA)

Argentina has an important system of vertical transfers with a compensatory aim including the convergence across sub-national regions. However, there still exist high levels of asymmetries among the country provinces. 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 effect 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.