Resource title

Inefficient lock-in and subsidy competition

Resource image

image for OpenScout resource :: Inefficient lock-in and subsidy competition

Resource description

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 inefficiently 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 relocates 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.

Resource author

Rainald Borck, Hyun-Ju Koh, Michael Pflüger

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26637

Resource license

Adapt according to the presented license agreement and reference the original author.