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Trade integration and the destination of subsidies1

Published online by Cambridge University Press:  17 August 2016

Nelly Exbrayat ,
Carl Gaigné  and
Stéphane Riou
Nelly Exbrayat
Affiliation:
Wissenschaftszentrum Berlin für Sozialforschung (WZB) and CREUSET-CNRS, Université de Saint-Etienne. E-mail: exbrayat@wzb.eu
Carl Gaigné
Affiliation:
INRA, UMR1302, Rennes. E-mail: gaigne@rennes.inra.fr
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Summary

We build a model of trade and location with two countries which differ with respect to their level of productivity. Public spending has two possible allocations: a direct subsidy to immobile households or a wage subsidy to mobile firms. We show that firms receive a lower net of tax subsidy in the high-productivity country than in the low-productivity one. Despite this less generous policy, the former country can host a larger share of firms, so that its total spending for firms can be higher than in the low-productivity country when trade costs are low enough. The welfare analysis suggests that the second-best optimum requires an increase in the subsidy to households in both countries when the economies are weakly integrated or the productivity gap is low or the share of capital incomes redistributed outside the two economies is high.

Résumé

Résumé

Nous développons un modèle de commerce et de localisation comprenant deux pays différents en terme de productivité. Les dépenses publiques ont deux affectations possibles : une subvention forfaitaire aux ménages immobiles et une aide aux firmes mobiles diminuant le coût salarial qu'elles supportent. Nous montrons qu'à l'équilibre en subventions le pays à haute productivité alloue aux firmes une aide publique nette de taxe plus faible. En dépit de cette politique moins généreuse, le premier pays accueille une plus grande part de firmes de sorte que ses dépenses totales en faveur de ces dernières peuvent être plus importantes que dans le pays à faible productivité quand l'intégration commerciale est suffisamment avancée. L'analyse de bien-être suggère que l'optimum de second rang nécessite une politique plus généreuse vis-à-vis des ménages lorsque les économies sont faiblement intégrées, que l'écart de productivité est faible ou qu'une part importante des propriétaires du capital réside en dehors des deux économies.

Keywords

coûts aux échangeslocalisationstructure des dépenses publiquesF12F15H23trade integrationfirm locationpublic expenditure compositionF12F15H23
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 75 , Issue 4 , December 2009 , pp. 407 - 423
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2009 

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Footnotes

1

We wish to thank for their comments and suggestions participants at the 53rd congress of the RSAI in Toronto, at the workshop ‘regional agglomeration, growth, and multi-level governance’ in Ghent, at the workshop ‘EU countries in fiscal competition’ in Mannheim and at the 21st annual congress of the EEA in Vienna.

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