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

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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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  • Sheard, Nicholas, 2011. "Regional Policy in a Multiregional Setting: When the Poorest are Hurt by Subsidies," Research Papers in Economics 2011:11, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2011_0011
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    File URL: http://www2.ne.su.se/paper/wp11_11.pdf
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    1. 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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    Keywords

    Regional policy; production externalities; agglomeration; multiregion model;

    JEL classification:

    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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