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Trade integration and the destination of subsidies

Author

Listed:
  • Nelly Exbrayat

    () (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)

  • Carl Gaigne

    (INRA-ESR - Unité d'économie et de sociologie rurales - INRA - Institut National de la Recherche Agronomique)

  • Stéphane Riou

    () (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)

Abstract

We build a model of trade and location with two countries which differ with respect to their level of productivity. Public spending has two possible allocations: a direct subsidy to immobile households or a wage subsidy to mobile firms. We show that firms receive a lower net of tax subsidy in the high-productivity country than in the low-productivity one. Despite this less generous policy, the former country can host a larger share of firms, so that its total spending for firms can be higher than in the low-productivity country when trade costs are low enough. The welfare analysis suggests that the second-best optimum requires an increase in the subsidy to households in both countries when the economies are weakly integrated or the productivity gap is low or the share of capital incomes redistributed outside the two economies is high. JEL code: F12, F15, H23.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Nelly Exbrayat & Carl Gaigne & Stéphane Riou, 2009. "Trade integration and the destination of subsidies," Post-Print hal-00430039, HAL.
  • Handle: RePEc:hal:journl:hal-00430039
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00430039
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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