Abstract
Capital grants are the mainstay of most countries' regional-incentive packages. From an economic point of view it is hard to understand why governments choose to give subsidies to reduce the cost of capital. For if the objective is to reduce the unemployment problem in a specific district, it seems reasonable to encourage labor-intensive firms to establish production in that region. In this article, I discuss this discrepancy between the policy usually recommended by economists and the policy carried out by politicians. I show that giving capital grants can be the best regional policy if important dynamic aspects of the policy problem are considered.
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