Subsidy Competition Between Regions: An Extension to Cross-shareholding and Employment Concerns

In this chapter, we investigate the relationship between firms’ regional location choices and the subsidy policies of regional governments in an imperfectly competitive third-market model. The seminal paper by Janeba (J Int Econ 44(1):135–153, 1998) has found that no subsidies are given to firms, and we check whether this result continues to hold when we extend the model in two ways. First, we incorporate the distributions of firms’ shareholders across regions to examine whether the difference in these distributions affects the zero-subsidy result. We demonstrate that even if firms’ shareholders are located in both regions, the zero-subsidy result continues to hold. Second, we consider the situation in which regional governments have concerns about the regional employment associated with firms’ locations, and we examine whether these governments’ consideration of employment affects the zero-subsidy result. We find that when regional governments have concerns about regional employment, the subsidy competition has no subgame perfect Nash equilibrium.