Research Papers in Economics, Department of Economics, Stockholm University
Regional Policy in a Multiregional Setting: When the Poorest are Hurt by Subsidies
Abstract: Regional policies that seek to reduce economic
inequalities between regions are common. These policies normally involve
subsidies or transfers to the poorest regions. Over any given short-term
horizon such subsidies serve to reduce inter-regional inequalities, but as
they also affect migration patterns the long-term effects are less clear.
This paper demonstrates using a three-region, general equilibrium model
that subsidising the poorest region may be to the detriment of the
periphery as a whole and even to the very region that receives the subsidy,
if the subsidy draws firms away from a nearby region that would function
better as a production centre. Though further research is needed to isolate
the conditions under which such an effect would arise, the result has
potentially important implications for the design of regional policy.
Keywords: Regional policy; production externalities; agglomeration; multiregion model; (follow links to similar papers)
JEL-Codes: H29; R12; R13; (follow links to similar papers)
42 pages, March 28, 2011
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