LONG-RUN EFFECTS OF REGIONAL POLICY IN AN ECONOMIC UNION

Regional policy in economic unions (e.g. in the European Union) is usu ally conducted with the objective of overcoming regional disparities. By developing a two-regional growth model with endogenous technologica l change, we address the long-term implications of regional policy mea sures. We show that regional policies aiming to support the less-devel oped region do not only change the location of production between the regions but also affect the overall growth performance of the union. B y altering the incentive to accumulate knowledge capital, regional pol icies influence the steady-state growth rate. Our analysis shows that a potential trade-off between regional equity and dynamic efficiency e xists.