Prepared for the Conference on “Regional Development Policy and Convergence in the EU” European Investment Bank Forthcoming EIB Papers

This paper analyses the efficiency and the equity motives that can justify regional policies. The market failure induced by localized technological spillovers entails too little agglomeration. However, coordination failures and the fact that firms do not take into account the welfare of immobile agents entail too much agglomeration. We argue that diminishing inter-regional inequality may have an undesirable impact on inequalities between workers and capital owners in the rich region. We also analyze the short-term demand and the long term supply effects of regional policies. Finally, we argue that due to non linear effects, regional policies may be useless most of the time and very powerful in particular circumstances. Introduction. Spatial concentration of economic activities is one of the most salient features of economic development. The almost parallel urge by policymakers to counteract such a trend through public polices is also striking. This is not only reserved to those countries, especially in Europe, which have a long tradition of public intervention. To a lower extent, the Unite