Redistribution policy: A European model

Following the rationale for regional redistribution programs described in the official documents of the European Union, this paper studies a simple multicountry model built around two regions: a core and a periphery. Technological spillovers link firms’ productivity within each of the two regions, and each country’s territory falls partly in the core and partly in the periphery, but the exact shares vary across countries. In line with the official view of the European Union, we find that the efficient regional allocation requires both national and international transfers. If migration is fully free across all borders, the optimal redistribution policy results from countries’ uncoordinated policies. However, if countries have the option of setting even imperfect border barriers, then efficiency is likely to require coordination on both barriers and international transfers (both of which will be set at positive levels). The need for coordination increases as the Union increases in size. D 2004 Elsevier B.V. All rights reserved.