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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/26637
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| Title: | | Inefficient lock-in and subsidy competition  |
| Authors: | | Borck, Rainald Koh, Hyun-Ju Pflüger, Michael |
| Issue Date: | | 2009 |
| Series/Report no.: | | CESifo working paper 2592 |
| Abstract: | | 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. |
| Subjects: | | Agglomeration asymmetric regions subsidy competition |
| JEL: | | F12 F15 H25 H73 R12 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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