Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73440
Authors: 
Borck, Rainald
Koh, Hyun-Ju
Pflüger, Michael
Year of Publication: 
2009
Series/Report no.: 
BGPE Discussion Paper 70
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 ineffi- ciently 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 re- locates 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
Welfare
JEL: 
F12
F15
H25
H73
R12
Document Type: 
Working Paper

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