Transfers, agglomeration and German unification

This paper analyses in the framework of a 2-region economic geography model the impact of transfers on agglomeration of economic activity. Two main results can be derived: First, subsidies to the activity of firms are more efficient to avoid agglomeration than subsidies to consumers (social policy). Second, if a less developed region starts its catch up process first increasing and afterwards decreasing transfers are necessary to avoid agglomeration. Due to these results east Germany's slowdown of convergence may be a consequence of too less transfers and especially too less firm subsidies. Furthermore, if east Germany locates still at the first stage of convergence even increasing transfers would be necessary to guarantee convergence.