Perpetuating regional asymmetries through income transfers

Abstract

This paper studies the e¤ect of income transfers on the distribution of economic activity through a modi…ed footloose entrepreneurs model. The model incorporates some key features of the Dutch Disease literature: sectorial mobility and nontradable goods. If foreign competition is high (high trade openness), transfers could cause a Dutch Disease in the short and long run. For intermediate levels of foreign competition, Dutch Disease appears only in the short run. And, for low levels, the recipient region always bene…ts from the income transfers. Additionally, when economies of scale are large, the transfers could perpetuate a core-periphery structure.

Spatial Economics and Nonmanufacturing Sectors

“…As in the models of a small open economy, the existence of nontradable goods is important for us to disclose some puzzles. A recent paper by Morales (2021) establishes an NEG model to analyze the transfer paradox. This paradox refers to the well-known fact that a region can be hurt by accepting an income transfer.…”

“…The model is established by Morales (2021), who finds that deindustrialization in the recipient region may happen even when the two regions are originally symmetric if trade costs are low. To show the mechanism, a nontradable sector is incorporated into the model of heterogeneous agricultural goods in Sect.…”

“…For expositional clarity, the subsequent analysis assumes a ¼ 1. 10 We make two changes to the model of Morales (2021). First, we assume that the income transfer is between immobile unskilled workers.…”

“…This simplifies the analysis of a long-term equilibrium. Second, while Morales (2021) assumes the same elasticity in the manufacturing and agricultural sectors, we differentiate them to gain more results regarding the agricultural sector without sacrificing too much convenience.…”

“…Based on a small open economy model, Yano and Nugent (1999) demonstrate that increased production of nontraded goods can change the domestic price so as to offset the benefits of aid and create such a transfer paradox. Morales (2021) uses an NEG model to show that even a slight income transfer between two symmetric regions may deindustrialize the recipient region and reduce the nominal wages of workers in the recipient region when trade costs of the manufactured goods are low.…”