Template-Type: ReDIF-Paper 1.0

Author-Name: Rainald Borck
Author-X-Name-First: Rainald
Author-X-Name-Last: Borck

Author-Name: Hyun-Ju Koh
Author-X-Name-First: Hyun-Ju
Author-X-Name-Last: Koh

Author-Name: Michael Pflüger
Author-X-Name-First: Michael
Author-X-Name-Last: Pflüger

Title: Inefficient lock-in and subsidy competition

Abstract: This paper shows that subsidy competition may be efficiency enhancing. We
model a subsidy game among two asymmetric regions in a new trade model, where
capital can freely move among regions, but capital rewards are repatriated. We study
subsidy competition, starting from an equilibrium where the industry core is ineffi-
ciently locked in to the smaller region. When regions weigh workers' and capitalists'
welfare equally, the core region will set its subsidy low enough that the industry re-
locates to the larger region, restoring an efficient allocation. When workers' welfare
is weighted more heavily, the core may pay subsidies that are high enough to prevent
a relocation of industry.
Length:  33 pages
Creation-Date:  2009-03
File-URL: http://www.bgpe.de/texte/DP/070_koh.pdf
File-Format: Application/pdf
File-Function: First version, 2009
Number: 070
Classification-JEL: F12; F15; H25; H73; R12
Keywords: agglomeration; asymmetric regions; subsidy competition;
Welfare
Handle: RePEc:bav:wpaper:070_koh