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Trade integration and the destination of subsidies

Nelly Exbrayat, Carl Gaigne and Stephane Riou ()
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Nelly Exbrayat: Social Science Research Center Berlin

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Abstract: We build a model of trade and location with two countries which differ with respect to their level of productivity. Public expenditures are shared between a subsidy to firms reducing the labor cost and another one to households. We show that the high-productivity country pays a lower net subsidy to each firm than does the other country. Nevertheless, the high-productivity country succeeds in attracting a majority of firms and invests more public expenditures for firms and households if trade cost are high enough. Finally, the welfare analysis suggests that the non-cooperative level of net subsidy to firms can be inefficiently low in the high-productivity country under some conditions -- such as the distribution of profits and the level of trade costs -- while it is always inefficiently high in the low-productivity country.

Keywords: TRADE INTEGRATION; FIRM LOCATION; PUBLIC EXPENDITURE STRUCTURE; COUTS AUX ECHANGES; LOCALISATION; STRUCTURE DES DEPENSES PUBLIQUES; europe; commerce; revenu (search for similar items in EconPapers)
Date: 2009
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01462526
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Published in Recherches Economiques de Louvain - Louvain economic review, De Boeck Université, 2009, 75 (4), pp.407-423. 〈10.3917/rel.754.0407〉

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01462526

DOI: 10.3917/rel.754.0407

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