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Inefficient lock-in and subsidy competition

Author

Listed:
  • Rainald Borck
  • Hyun-Ju Koh
  • Michael Pflüger

Abstract

This paper shows that subsidy competition may be efficiency enhancing. We model a subsidy game among two asymmetric regions in a new trade model, where capital can freely move among regions, but capital rewards are repatriated. We study subsidy competition, starting from an equilibrium where the industry core is ineffi- ciently locked in to the smaller region. When regions weigh workers' and capitalists' welfare equally, the core region will set its subsidy low enough that the industry re- locates to the larger region, restoring an efficient allocation. When workers' welfare is weighted more heavily, the core may pay subsidies that are high enough to prevent a relocation of industry.

Suggested Citation

  • Rainald Borck & Hyun-Ju Koh & Michael Pflüger, 2009. "Inefficient lock-in and subsidy competition," Working Papers 070, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:070_koh
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, Elsevier.
    2. Hyun-Ju Koh & Ferdinand Mittermaier, 2009. "The winner gives it all: Unions, tax competition and offshoring," Working Papers 079, Bavarian Graduate Program in Economics (BGPE).
    3. repec:kap:sbusec:v:49:y:2017:i:3:d:10.1007_s11187-017-9855-9 is not listed on IDEAS
    4. Michael Pflüger & Stephan Russek, 2014. "Trade and Industrial Policies with Heterogeneous Firms: The Role of Country Asymmetries," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 170-188, February.
    5. Hayato Kato, 2017. "Lobbying and Tax Competition in an Oligopolistic Industry: A Reverse Home Market Effect," Keio-IES Discussion Paper Series 2017-028, Institute for Economics Studies, Keio University.
    6. Augusto Cerqua & Guido Pellegrini, 2014. "Beyond the SUTVA: how policy evaluations change when we allow for interactions among firms," Working Papers 2/14, Sapienza University of Rome, DISS.
    7. Nie, Pu-yan & Yang, Yong-cong & Chen, You-hua & Wang, Zhao-hui, 2016. "How to subsidize energy efficiency under duopoly efficiently?," Applied Energy, Elsevier, vol. 175(C), pages 31-39.
    8. repec:eee:renene:v:121:y:2018:i:c:p:420-428 is not listed on IDEAS

    More about this item

    Keywords

    agglomeration; asymmetric regions; subsidy competition; Welfare;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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