Inefficient Lock-in and Subsidy Competition

Rainald Borck, Hyun-Ju Koh and Michael Pflüger

No 2592, CESifo Working Paper Series from CESifo

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.

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

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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:ces:ceswps:_2592

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