Regional subsidies and interregional labor movement

Daisuke Matsuzaki () and Yoshiyasu Ono
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Daisuke Matsuzaki: Toyo University

The Annals of Regional Science, 2021, vol. 66, issue 3, No 3, 557-577

Abstract: Abstract Japan distributes lump-sum grants and subsidies to the vast majority of local regions. Each region makes a decision regarding expenditure and can choose between non-distortionary direct transfers to the region’s natives and subsidies to stimulate the local economy. Considering a two-region economy with interregional labor migration, we compare the welfare effects of direct transfers and economic stimulation subsidies including those intended to support production, employment, wages, and residents. The results show that under full employment, replacing direct transfers with stimulation subsidies benefits (harms) natives if the recipient region specializes in labor-intensive (labor-saving) activities. However, such replacements can be detrimental to natives if the region suffers unemployment due to wage rigidity. For example, wage and resident subsidies may cause harm as they promote immigration, without stimulating production.

JEL-codes: H71 R23 R51 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Regional subsidies and interregional labor movement (2018)
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DOI: 10.1007/s00168-020-01029-8

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