Inefficient lock-in and subsidy competition

Arbeitspapier

This paper shows that subsidy competition may be efficiency enhancing. We model a subsidy game among two asymmetric regions in a new trade model, where capital can freely move among regions, but capital rewards are repatriated. We study subsidy competition, starting from an equilibrium where the industry core is inefficiently locked in to the smaller region. When regions weigh workers' and capitalists' welfare equally, the core region will set its subsidy low enough that the industry relocates to the larger region, restoring an efficient allocation. When workers' welfare is weighted more heavily, the core may pay subsidies that are high enough to prevent a relocation of industry.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2592

Classification and Topics

• Classification: Wirtschaft ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Economic Integration ; Business Taxes and Subsidies including sales and value-added (VAT) ; State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects ; Size and Spatial Distributions of Regional Economic Activity
• Subject: Agglomeration ; asymmetric regions ; subsidy competition ; Subvention ; Standortwettbewerb ; Regionale Konzentration ; Neue Außenhandelstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Borck, Rainald ; Koh, Hyun-Ju ; Pflüger, Michael
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/26637
• Last update: 10.03.2025, 11:44 AM CET