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

Hassan Molana; Catia Montagna

doi:10.1111/roie.12354

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

Hassan Molana, Catia Montagna (Corresponding Author)

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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 language	English
Pages (from-to)	1154-1177
Number of pages	24
Journal	Review of International Economics
Volume	26
Issue number	5
Early online date	26 Jul 2018
DOIs	https://doi.org/10.1111/roie.12354
Publication status	Published - Nov 2018

Keywords

optimal policy
wage subsidies
competitive selection
international trade

Access to Document

10.1111/roie.12354Licence: Unspecified

Accepted Manuscript
This is the peer reviewed version of the following article: Molana H, Montagna C. Competitive selection, trade, and employment: The strategic use of subsidies. Rev Int Econ. 2018;26:1154–1177, which has been published in final form at https://doi.org/10.1111/roie.12354. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Accepted author manuscript, 1.52 MBLicence: Unspecified

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Catia Montagna
- Business School, Economics - Jaffrey Chair of Political Economy
- Business and Management Studies
Person: Academic

Cite this

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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",

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