Cohesion Policy and Inequality Dynamics: Insights from a Heterogeneous Agents Macroeconomic Model
44 Pages Posted: 18 Dec 2013
Date Written: December 2013
Regions within the European Union differ substantially not only with respect to per capita GDP, but also with respect to income inequality within the regions. This paper studies the effects of different types of technology-oriented cohesion policies, aiming at the reduction of regional differences, on the convergence of regions and the dynamics of income inequality within regions. In particular, policies are analyzed using a two-region agent-based macroeconomic model – the Eurace@Unibi model – where firms in the lagging region receive subsidies for investment in physical capital. It is demonstrated that the short-, medium- and long-term effects of the policies on per-capita output and between as well as within regional inequality differ substantially depending on how successful the policy is in incentivizing firms to choose best available capital vintages and on how flexible labor markets are in the targeted region.
Keywords: cohesion policies, technology adoption, agent-based model, inequality
JEL Classification: C63, O33
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