REGIONAL-INCENTIVE PROGRAMS AND THE PROBLEM OF TIME-INCONSISTENT PLANS

Capital grants are the mainstay of most countries' regional-incentive packages. From an economic point of view it is hard to understand why governments choose to give subsidies to reduce the cost of capital. Fo r if the objective is to reduce the unemployment problem in a specific district, it seems reasonable to encourage labor-intensive firms to e stablish production in that region. In this article, I discuss this di screpancy between the policy usually recommended by economists and the policy carried out by politicians. I show that giving capital grants can be the best regional policy if important dynamic aspects of the po licy problem are considered.