Abstract
ABSTRACT This paper focuses on the question of the effectiveness of subsidies to private and public investment, which are a key component of European regional policy. Given mixed findings from empirical studies, it is worth studying this issue in a simulation model, where the results can be traced back to policy shocks and model assumptions. To this end, the paper employs a multiregional dynamic framework with a perfectly integrated capital market. It is found that investment subsidies are effective and capital market spillover effects are small. The argument is illustrated by numerical simulations of actual investment subsidies to the European Union regions.
Highlights
Both in the European Union (EU) and in European countries in general, subsidizing investment in lagging regions is the most important regional policy instrument (European Union, 2017)
This paper focuses on the question of the effectiveness of subsidies to private and public investment, which are a key component of European regional policy
From the theory point of view, investment subsidies are mainly seen as an instrument for strengthening regional economic activity and boosting economic growth (Barro & Sala-i-Martin, 1995)
Summary
Both in the European Union (EU) and in European countries in general, subsidizing investment in lagging regions is the most important regional policy instrument (European Union, 2017). The target regions gain more through a subsidy to private capital than through a lump-sum transfer (what we refer to as strong effectiveness below). The regions in the model differ in terms of their factor stocks, the calibrated productivity parameters, exogenous labour tax rates, trade costs (which depend on the actual location of the region), structure of trade and volume of EU funding in the scenarios.
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