Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2011:11: Regional Policy in a Multiregional Setting: When the Poorest are Hurt by Subsidies

Nicholas Sheard ()
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Nicholas Sheard: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

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

JEL-codes: H29; R12; R13

42 pages, March 28, 2011

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