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

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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File URL: http://www2.ne.su.se/paper/wp11_11.pdf
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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2011:11.

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Length: 42 pages
Date of creation: 28 Mar 2011
Date of revision:
Handle: RePEc:hhs:sunrpe:2011_0011
Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Web page: http://www.ne.su.se/
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  1. Matsuyama, Kiminori & Takahashi, Takaaki, 1998. "Self-Defeating Regional Concentration," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 211-34, April.
  2. Martin, Philippe, 1999. "Public policies, regional inequalities and growth," Journal of Public Economics, Elsevier, vol. 73(1), pages 85-105, July.
  3. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  4. Ulltveit-Moe, Karen-Helene, 2004. "Regional Policy Design: An Analysis of Relocation, Efficiency and Equity," CEPR Discussion Papers 4321, C.E.P.R. Discussion Papers.
  5. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  6. Pierre-Philippe Combes, 2011. "The empirics of economic geography: how to draw policy implications?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 147(3), pages 567-592, September.
  7. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  8. Philippe Martin, 1999. "Are European regional policies delivering?," Sciences Po publications info:hdl:2441/9343, Sciences Po.
  9. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
  10. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  11. Faini, Riccardo, 1983. "Cumulative processes of de-industrialisation in an open region : The case of Southern Italy, 1951-1973," Journal of Development Economics, Elsevier, vol. 12(3), pages 277-301, June.
  12. Teixeira, Antonio Carlos, 2006. "Transport policies in light of the new economic geography: The Portuguese experience," Regional Science and Urban Economics, Elsevier, vol. 36(4), pages 450-466, July.
  13. Holl, Adelheid, 2004. "Manufacturing location and impacts of road transport infrastructure: empirical evidence from Spain," Regional Science and Urban Economics, Elsevier, vol. 34(3), pages 341-363, May.
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