Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic

Philippe Martin and Vincent Dupont

No 4107, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the effect of different types of regional subsidies to poor regions on industrial location, employment, income inequality - between and inside regions - and welfare. We show that the impact on location of such subsidies is stronger when trade costs are low. When firms are mobile, regional subsidies that take the form of tax breaks or subsidies to the fixed cost lead to higher profits for all firms, even those not located in the region that gives the subsidy. If financed at the national level, such subsidies, given to firms in the poor region increase regional income inequality as the rich region owns more capital. Hence, even though they constitute an official financial transfer from the rich to the poor region, they actually lead to an income transfer from the poor to the rich region. It also leads to higher inequality within regions. When financed at the local level, subsidies succeed in attracting firms. Besides, as regional subsidies to firms of the manufacturing sector in the poor region alter local competition and firm size, they may actually lead to a decrease of regional employment and production of that sector in the poor region. Finally, with relocation costs, such regional subsidies may hurt the poor region.

Keywords: Regional subsidies; Regional inequalities; Economic geography (search for similar items in EconPapers)
JEL-codes: H2 H7 R0 (search for similar items in EconPapers)
Date: 2003-11
New Economics Papers: this item is included in nep-geo and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://cepr.org/publications/DP4107 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Subsidies to poor regions and inequalities: some unpleasant arithmetic (2006)
Working Paper: Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic (2006)
Working Paper: Subsidies to poor regions and inequalities: some unpleasant arithmetic (2006)
Working Paper: Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4107

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4107

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().