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Trade integration and the destination of subsidies


  • Nelly Exbrayat

    (Social Science Research Center Berlin)

  • Carl Gaigné

    () (SMART - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST)

  • Stéphane Riou

    () (CREUSET - Université Jean Monnet (Saint-Etienne))


We build a model of trade and location with two countries which differ with respect to their level of productivity. Public expenditures are shared between a subsidy to firms reducing the labor cost and another one to households. We show that the high-productivity country pays a lower net subsidy to each firm than does the other country. Nevertheless, the high-productivity country succeeds in attracting a majority of firms and invests more public expenditures for firms and households if trade cost are high enough. Finally, the welfare analysis suggests that the non-cooperative level of net subsidy to firms can be inefficiently low in the high-productivity country under some conditions -- such as the distribution of profits and the level of trade costs -- while it is always inefficiently high in the low-productivity country.

Suggested Citation

  • Nelly Exbrayat & Carl Gaigné & Stéphane Riou, 2009. "Trade integration and the destination of subsidies," Post-Print hal-01462526, HAL.
  • Handle: RePEc:hal:journl:hal-01462526
    DOI: 10.3917/rel.754.0407
    Note: View the original document on HAL open archive server:

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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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