Can regional policy in a federation improve economic efficiency?

Fuest, Clemens and Huber, Bernd (2006) Can regional policy in a federation improve economic efficiency? Journal of Public Economics, 90 (3). pp. 499-511.

Abstract

In the European Union and in many federal and non-federal countries, the central government pays subsidies to poor regions. These subsidies are often seen as a redistributive measure which comes at the cost of an efficiency loss. This paper develops an economic rationale for regional policy based on economic efficiency. We consider a model of a federation consisting of a rich and a poor region. The economy is characterized by imperfect competition in goods markets and unemployment. Firms initially produce in the rich region but may relocate their production to the poor region. We show that a subsidy on investment in the poor region unambiguously increases welfare if labour markets are competitive. If there is unemployment in both regions, the case for regional subsidies is weaker.

Item Type: Article
Keywords: Regional policy; Fiscal federalism
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 25 Apr 2012 11:38
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3474

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