• I would like to thank Michael Artis, Richard E. Baldwin, Matthiew Crozet, Bellone Flora, Francis Kramarz, Vincent Rebeyrol, Reinier de Jong, Ben Morton, Gareth Downing, an editor, and two anonymous referees for their helpful comments and suggestions. Also, I would like to thank participants at the Workshop on Economics: Heterogeneity of Firms, Productivity and Trade (Granada, Spain on November 18, 2006). This research is partly financed by Grant-in-Aid for Scientific Research (JSPS). The first version of this paper was published as discussion paper in Graduate Institute, Geneva in March 2006 (HEIWP 2006–16).


ABSTRACT This paper studies antiagglomeration subsidies in a core–periphery setting when firms are heterogeneous in labor productivity, focusing on the effects of a relocation subsidy on firm location in various tax-financing schemes (local vs. global). I discuss how a subsidy can enhance welfare and average productivity in the periphery. As a result, I find that a subsidy proportional to profits can induce the relocation of high-productivity firms and thus increase welfare and average productivity in the periphery. Concerning tax-financing schemes, a local tax-financing scheme has an optimal level of subsidy.