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Can regional policy in a federation improve economic efficiency?

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  • Fuest, Clemens
  • Huber, Bernd

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.

Suggested Citation

  • Fuest, Clemens & Huber, Bernd, 2006. "Can regional policy in a federation improve economic efficiency?," Munich Reprints in Economics 20331, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:20331
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    2. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 171-192, October.
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    Cited by:

    1. Salima Bouayad Agha & Nadine Turpin & Lionel Vedrine, 2010. "Fostering the potential endogenous development of European regions: a spatial dynamic panel data analysis of the Cohesion Policy on regional convergence over the period 1980-2005," Working Papers halshs-00812077, HAL.
    2. bouayad-agha-Hamouche, salima & turpin, nadine & védrine, lionel, 2012. "Fostering the potential endogenous development of European regions: a spatial dynamic panel data analysis of the Cohesion Policy," MPRA Paper 65470, University Library of Munich, Germany.
    3. Becker, Johannes & Fuest, Clemens, 2010. "EU regional policy and tax competition," European Economic Review, Elsevier, vol. 54(1), pages 150-161, January.
    4. Hélène Laurent & Michel Mignolet & Olivier Meunier, 2009. "Regional policy: What is the most efficient instrument?," Papers in Regional Science, Wiley Blackwell, vol. 88(3), pages 491-507, August.
    5. Kiryluk-Dryjska, Ewa, 2008. "Zastosowanie Modelu Optymalizacyjnego Do Alokacji Środków Strukturalnych," Village and Agriculture (Wieś i Rolnictwo), Polish Academy of Sciences (IRWiR PAN), Institute of Rural and Agricultural Development, vol. 4(141).
    6. Robert Fenge & Volker Meier, 2006. "Subsidies for Wages and Infrastructure: How to Restrain Undesired Immigration," CESifo Working Paper Series 1741, CESifo.
    7. Zhen Su & Joshua R. Aaron & William C. McDowell & Dan Dan Lu, 2019. "Sustainable Synergies between the Cultural and Tourism Industries: An Efficiency Evaluation Perspective," Sustainability, MDPI, vol. 11(23), pages 1-20, November.
    8. Wegener, Stefan & Kiryluk, E., 2008. "Regional aspects of decision-making support for rural development in Poland," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43845, European Association of Agricultural Economists.

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