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Regional Policy in a Multiregional Setting: When the Poorest are Hurt by Subsidies

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  • Sheard, Nicholas

    ()
    (Dept. of Economics, Stockholm University)

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.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2011:11.

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Length: 42 pages
Date of creation: 28 Mar 2011
Date of revision:
Handle: RePEc:hhs:sunrpe:2011_0011

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Web page: http://www.ne.su.se/
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Keywords: Regional policy; production externalities; agglomeration; multiregion model;

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  1. Philippe Martin, 1999. "Are European regional policies delivering?," Sciences Po publications info:hdl:2441/9343, Sciences Po.
  2. Ulltveit-Moe, Karen Helene, 2007. "Regional policy design: An analysis of relocation, efficiency and equity," European Economic Review, Elsevier, vol. 51(6), pages 1443-1467, August.
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  7. Faini, Riccardo, 1983. "Cumulative processes of de-industrialisation in an open region : The case of Southern Italy, 1951-1973," Journal of Development Economics, Elsevier, vol. 12(3), pages 277-301, June.
  8. Vincent Dupont & Philippe Martin, 2006. "Subsidies to poor regions and inequalities: some unpleasant arithmetic," Journal of Economic Geography, Oxford University Press, vol. 6(2), pages 223-240, April.
  9. Martin, Philippe, 1999. "Public policies, regional inequalities and growth," Journal of Public Economics, Elsevier, vol. 73(1), pages 85-105, July.
  10. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  11. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  12. Teixeira, Antonio Carlos, 2006. "Transport policies in light of the new economic geography: The Portuguese experience," Regional Science and Urban Economics, Elsevier, vol. 36(4), pages 450-466, July.
  13. Holl, Adelheid, 2004. "Manufacturing location and impacts of road transport infrastructure: empirical evidence from Spain," Regional Science and Urban Economics, Elsevier, vol. 34(3), pages 341-363, May.
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