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Subsidies to poor regions and inequalities: some unpleasant arithmetic

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  • Vincent Dupont
  • Philippe Martin

Abstract

This paper analyzes the effect of different regional subsidies to poor regions on industrial location, employment, income inequality and welfare in the presence of agglomeration forces when firms are mobile. The impact on location of such subsidies is stronger when trade costs are low. With mobile capital, regional subsidies such as tax breaks in the poor region lead to higher profits for firms in both regions. If financed at the national level, such subsidies given to firms in the poor region increase inequality between and within regions. Finally, with relocation costs, such regional subsidies may hurt the poor region. Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jeg/lbi019
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Bibliographic Info

Article provided by Oxford University Press in its journal Journal of Economic Geography.

Volume (Year): 6 (2006)
Issue (Month): 2 (April)
Pages: 223-240

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Handle: RePEc:oup:jecgeo:v:6:y:2006:i:2:p:223-240

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  1. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 171-192, October.
  2. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Munich Reprints in Economics 20295, University of Munich, Department of Economics.
  3. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  4. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
  5. Anthony J. Venables, 1993. "Equilibrium Locations of Vertically Linked Industries," CEP Discussion Papers dp0137, Centre for Economic Performance, LSE.
  6. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  7. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  8. Martin, Philippe, 1999. "Public policies, regional inequalities and growth," Journal of Public Economics, Elsevier, vol. 73(1), pages 85-105, July.
  9. Ray Owens & Pierre-Daniel Sarte, 1999. "Analyzing firm location decisions : is public intervention justified?," Working Paper 99-08, Federal Reserve Bank of Richmond.
  10. Forslid, Rikard, 2003. "Regional Policy, Integration and the Location of Industry," Research Papers in Economics 2003:7, Stockholm University, Department of Economics.
  11. Karen Helene Midelfart-Knarvik & Henry G. Overman, 2002. "Delocation and European integration: is structural spending justified?," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 321-359, October.
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