Research Area
Strategic issues and Perspectives


Scenario analyses of the effects of European regional investment subsidies

Problem description
Subsidising investment in lagging regions is the most important regional policy instrument, both at the EU level as well as within European countries. Some authors argue that this instrument is not specific enough to concentrate the aid towards the regions that are lagging behind most, because the benefits trickle down to other places and little is left to the regions to be supported themselves. There are potentially two channels that could transmit the benefits to places that were not intended to be supported in the first place: trade and the capital market. Under certain conditions the lagging regions thus might benefit less than if they got the money directly in a lump sum fashion.

The relative importance and the interactions between these two distribution channels under different regional settings is not yet well understood. The aim is therefore to construct a modelling framework, which on the one hand allows analysing the effects of regional investment subsidies on trade and capital flows, and on the other hand allows simulating the effects of actual European policies. The policy issue to be answered in this paper is to check under which conditions the investment subsidies may not be the appropriate instrument to support regional economies.

Research questions of the project
In which manner do capital flows affect the regional economic effects of investment subsidies? Which structural and policy factors determine the sign (positive or negative) of the effects? How can a model with many regions be calibrated for the analysis of actual policies?

In recent years, spatial computable general equilibrium (SCGE) models have become a popular tool of regional impact analysis of policies (Korzhenevych, 2016). The concept of an SCGE model implies the distinction of commodities, factors, firms, and households by location. This alone, however, is not the main distinguishing feature. Decisive for the ability of the SCGE models to bring forward new insights about the effects of policies is the incorporation of the fundamental principles of regional and spatial economics: factor mobility, economies of scale, and the presence of transport costs. These ideas are also central to modern trade and growth theory and to new economic geography (NEG). The corresponding theoretical framework is largely based on the work of Paul Krugman (Krugman, 1979, 1980, 1991).

The model to be constructed in this project is a dynamic spatial computable general equilibrium model for a closed system of regions (Bröcker and Korzhenevych, 2013).

Envisaged results and contribution to the objectives of the research area
The project should combine the research on economic issues and on European regional policy, which are both important parts of the research program in FB S.