Inefficient lock-in and subsidy competition

Rainald Borck, Hyun-Ju Koh and Michael Pflüger

No 70, Working Papers from Bavarian Graduate Program in Economics (BGPE)

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.

Keywords: agglomeration; asymmetric regions; subsidy competition; Welfare (search for similar items in EconPapers)
JEL-codes: F12 F15 H25 H73 R12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://bgpe.cms.rrze.uni-erlangen.de/files/2023/0 ... sidy-competition.pdf First version, 2009 (application/pdf)

Related works:
Journal Article: INEFFICIENT LOCK‐IN AND SUBSIDY COMPETITION (2012)
Working Paper: Inefficient Lock-in and Subsidy Competition (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bav:wpaper:070_koh

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