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

Hassan Molana, Catia Montagna (Corresponding Author)

Research output: Contribution to journalArticle

Abstract

Within a heterogeneous-firms model with endogenous labour 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. Due to international selection and fiscal externalities, non-cooperative policies entail under-subsidisation of wages. Targeted (domestic-only or export) wage subsidies are dominated from a welfare point of view by a uniform subsidy. Whilst 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

Keywords

  • optimal policy
  • wage subsidies
  • competitive selection
  • international trade

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