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Subsidy competition in integrating economies


  • Facundo Albornoz

    (University of Birmingham [Birmingham])

  • Grégory Corcos

    (PJSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)


Regional integration affects location decisions of MNCs and therefore influences each member country's provision of investment incentives, which in turn may trigger relocation. As a consequence, subsidy competition increases as integration proceeds. We analyze the welfare consequences of this phenomenon, modelling subsidization as a game between a MNC facing different location alternatives and governments that may deter or induce relocation by means of subsidies. We show that the combination of integration and subsidy competition may lead to an excess of subsidization. We also discuss how the interest of harmonizing subsidies, the net gains from integration crucially depend on technological differences, ownership and the absorption capacity of MNC profits by countries. Lastly, we find that the gain from supranational subsidy coordination increases with integration.

Suggested Citation

  • Facundo Albornoz & Grégory Corcos, 2005. "Subsidy competition in integrating economies," PSE Working Papers halshs-00590785, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00590785
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    References listed on IDEAS

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    Cited by:

    1. Toshihiro Okubo, 2012. "Antiagglomeration Subsidies With Heterogeneous Firms," Journal of Regional Science, Wiley Blackwell, vol. 52(2), pages 285-299, May.

    More about this item


    multinational corporations; regional integration; FDI; subsidy competition; location choice;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue


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