Integration Magnifies Locational Subsidy Effects and Cross-Border Ownership?

This paper investigates the welfare effects of an increase in location subsidy by constructing a general equilibrium linear space model, including transport costs and the cross-border ownership of equities. We assume a market structure with monopolistic competition in which entry is restricted and where fixed costs are not necessary. These model characteristics allow us to obtain the analytical welfare effects that have yet to be examined. We find that the subsidy increase improves (reduces) the domestic (foreign) welfare, regardless of the size of transport costs. However, closer economic integration magnifies the impacts of the location subsidy.