Competitive selection, trade, and employment: The strategic use of subsidies

Hassan Molana, Catia Montagna

    Research output: Contribution to journalArticle

    Abstract

    Within a heterogeneous-firms model with endogenous labor supply, intra-industry competitive selection is shown to affect the impact of wage (and entry) subsidies. Optimal uniform wage subsidies are always positive even though, by reducing industry selectivity, they lower average productivity. Because of international selection and fiscal externalities, noncooperative policies entail under-subsidization of wages. Targeted (domestic-only or export) wage subsidies are dominated from a welfare point of view by a uniform subsidy. While always having an opposite effect on average productivity, an optimal entry subsidy is shown to be less effective than an optimal uniform wage subsidy in raising employment and welfare.

    Original languageEnglish
    Pages (from-to)1154-1177
    Number of pages24
    JournalReview of International Economics
    Volume26
    Issue number5
    Early online date26 Jul 2018
    DOIs
    Publication statusPublished - Nov 2018

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