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

Fingerprint

wage subsidies
subsidy
wage
productivity
welfare
industry
labor supply
firm

Keywords

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

Cite this

@article{53f0ed48f87c41479ee84d18b75fcc0a,
title = "Competitive selection, trade, and employment: The strategic use of subsidies",
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.",
keywords = "optimal policy, wage subsidies, competitive selection, international trade",
author = "Hassan Molana and Catia Montagna",
note = "We thank Holger G{\"o}rg, Philipp Schr{\"o}der, Fredrik Sj{\"o}holm, participants at the Danish International Economics Workshop, seminar participants at Aberdeen, Sheffield and Loughborough, three anonymous referees and the Editor of the journal, for helpful comments and suggestions. Funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 290647 is gratefully acknowledged.",
year = "2018",
month = "11",
doi = "10.1111/roie.12354",
language = "English",
volume = "26",
pages = "1154--1177",
journal = "Review of International Economics",
issn = "1467-9396",
publisher = "Wiley",
number = "5",

}

TY - JOUR

T1 - Competitive selection, trade, and employment

T2 - The strategic use of subsidies

AU - Molana, Hassan

AU - Montagna, Catia

N1 - We thank Holger Görg, Philipp Schröder, Fredrik Sjöholm, participants at the Danish International Economics Workshop, seminar participants at Aberdeen, Sheffield and Loughborough, three anonymous referees and the Editor of the journal, for helpful comments and suggestions. Funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 290647 is gratefully acknowledged.

PY - 2018/11

Y1 - 2018/11

N2 - 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.

AB - 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.

KW - optimal policy

KW - wage subsidies

KW - competitive selection

KW - international trade

U2 - 10.1111/roie.12354

DO - 10.1111/roie.12354

M3 - Article

VL - 26

SP - 1154

EP - 1177

JO - Review of International Economics

JF - Review of International Economics

SN - 1467-9396

IS - 5

ER -