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

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    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
    Handle: RePEc:hhs:sunrpe:2011_0011
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    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. 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.
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