Investment subsidies and regional welfare: a dynamic framework and its application to the European regional policy

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.