Inefficient Lock‐in and Subsidy Competition*

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents in EconStor mayJEL Code: F12, F15, H25, H73, R12.

Lobbying and Tax Competition in an Agglomeration Economy: A Reverse Home Market Effect

“…* 9 In empirical studies, overall conclusions are mixed: Charlot and Paty (2007), Brülhart et al (2012) and Koh et al (2013) support the taxable-agglomeration-rents hypothesis, whereas Luthi and Schmidheiny (2014) and Brülhart and Simpson (2014) do not. * 10 A few exceptions include Sato and Thisse (2007), Borck et al (2012) and Ma and Raimondos-Møller (2015). The first two papers derive the reverse home-market effect by highlighting competition among firms for hiring workers (Sato and Thisse, 2007), by focusing on inter and intra-sector spillovers (Borck et al, 2012).…”

“…Political aspects in the analysis of tax competition are highlighted by Lai (2014) and Borck et al (2012). Lai (2014) incorporates the common agency approach as in our analysis, into the standard tax competition model.…”

“…* 10 A few exceptions include Sato and Thisse (2007), Borck et al (2012) and Ma and Raimondos-Møller (2015). The first two papers derive the reverse home-market effect by highlighting competition among firms for hiring workers (Sato and Thisse, 2007), by focusing on inter and intra-sector spillovers (Borck et al, 2012). Ma and Raimondos-Møller (2015) shows that the small country may win bidding competition for a single multinational plant through profit shifting opportunities.…”

“…Both of them focus on biased governments and obtain the reverse home-market effect, but they differ in research strategies. Borck et al (2012) adopt monopolistic competition and analyze corner solutions, whereas we adopt oligopolistic competition and look at interior equilibria.…”

“…He argues that the small country may set a higher tax rate than the large country unlike the standard models and ours. Borck et al (2012) consider subsidy competition in the new economic geography framework played by governments that maximize a weighted sum of workers'…”