Anti-agglomeration Subsidies with Heterogeneous Firms
This paper studies anti-agglomeration subsidies in a core-periphery setting when firms are heterogeneous in labour productivity, focusing on the effects of a relocation subsidy on firm location in various tax-financing schemes (local versus global). We discuss how a subsidy can enhance welfare and average productivity in the periphery. As a result we find that a subsidy proportional to profits can induce the relocation of high productivity firms and thus increase welfare and average productivity in the periphery. Concerning tax-financing schemes, a local tax financing scheme has an optimal level of subsidy.
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