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Title:Inefficient lock-in and subsidy competition PDF Logo
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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