Working Paper: CEPR ID: DP4321
Authors: Karen Helene Midelfart
Abstract: Despite substantial regional expenditures at both national and community level, European regional policies do not appear to deliver. The evidence suggests that neither efficiency gains nor reduced regional inequalities are attained. If there is any positive impact at all, then it is at the most a redistributional one. If transfers are mainly redistributional in nature, would policies based on non-distortionary financing be a better route to follow? We ask what are the alternatives to a distortionary regional policy forcing the delocation of activity. Are non-distortionary policies always more efficient than distortionary alternatives? We analyse these questions employing a new economic geography model, where we also take into account the importance of knowledge spillovers for productivity, industry location and policy. It is shown that the effectiveness of different regional policy depends on (i) intra-industry knowledge spillovers, (ii) inter-industry knowledge spillovers, and (iii) trade costs. Our analysis provides insight into what may be the reason for the lack of success of EU regional initiative.
Keywords: EU; Knowledge Spillovers; New Economic Geography; Regional Policy
JEL Codes: H20; O15; R12; R13; R30; R50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Intra-industry and inter-industry knowledge spillovers (O36) | Productivity (O49) |
| Relocation policies (J62) | Regional inequalities (R12) |
| Relocation policies (J62) | Social welfare (I38) |
| Tax schemes (nondistortionary) (H29) | Regional inequalities (R12) |
| Tax schemes (nondistortionary) (H29) | Earnings equality between skilled and unskilled labor (F66) |
| Tax schemes (focusing on mobile factors) (H26) | Negative impacts of distortionary policies (H31) |
| Tax schemes (focusing on mobile factors) (H26) | Social welfare (I38) |