Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic

Posted: 29 Feb 2008

See all articles by Vincent Dupont

Vincent Dupont

University of Lille I

Philippe Martin

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

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Abstract

This paper analyzes the effect of different regional subsidies to poor regions on industrial location, employment, income inequality and welfare in the presence of agglomeration forces when firms are mobile. The impact on location of such subsidies is stronger when trade costs are low. With mobile capital, regional subsidies such as tax breaks in the poor region lead to higher profits for firms in both regions. If financed at the national level, such subsidies given to firms in the poor region increase inequality between and within regions. Finally, with relocation costs, such regional subsidies may hurt the poor region.

JEL Classification: R0, H2, H7

Suggested Citation

Dupont, Vincent and Martin, Philippe, Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic. Journal of Economic Geography, Vol. 6, No. 2, pp. 223-240, 2006. Available at SSRN: https://ssrn.com/abstract=917728

Vincent Dupont (Contact Author)

University of Lille I ( email )

104, avenue du peuple Belge
Villeneuve d'Ascq Cedex, 59655
France
+33 3 20 43 43 43 (Phone)

Philippe Martin

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4313 6385 (Phone)
+33 1 4313 6382 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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