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Trade integration and the destination of subsidies

Nelly Exbrayat, Carl Gaigne and Stephane Riou ()

No 2009041, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We build a model of trade and location with two countries which differ with respect to their level of productivity. Public spending has two possible allocations: a direct subsidy to immobile households or a wage subsidy to mobile firms. We show that firms receive a lower net tax subsidy in the high-productivity country than in the low productivity one. Despite this less generous policy, the former country can host a larger share of firms, so that its total spending for firms can be higher than in the low productivity country when trade costs are low enough. The welfare analysis suggest that the second-best optimum requires an increase in the subsidy to households in both countries when the economies are weakly integrated or the productivity gap is low or the share of capital incomes redistributed outside the two economies is high.

Keywords: trade integration; firm location; public expenditure composition (search for similar items in EconPapers)
JEL-codes: F12 F15 H23 (search for similar items in EconPapers)
Date: 2009-12-01
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Journal Article: Trade integration and the destination of subsidies (2009) Downloads
Working Paper: Trade integration and the destination of subsidies (2009)
Working Paper: Trade integration and the destination of subsidies (2009)
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