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REPLY TO SUBSIDIES, ADDITIONALITY AND FINANCIAL CONSTRAINTS
Author(s) -
Wren Colin
Publication year - 1996
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/j.1467-9787.1996.tb01114.x
Subject(s) - subsidy , additionality , homogeneous , marginal cost , economics , differential (mechanical device) , finance , business , public economics , microeconomics , market economy , physics , engineering , thermodynamics , aerospace engineering
. In Wren (1994) I find that industrial subsidies have significantly greater employment effects in small firms, and interpret this as arising from the poorer access that these firms have to private funds. Holden and Swales (1996) criticize this interpretation, arguing that financial constraints typically limit the effectiveness of subsidies. In this paper I show that their results arise from the particular properties of the homogeneous production function. More generally, I show that the effectiveness of assistance increases with the marginal cost of private funds and is greater in those firms facing financial constraints. As such, differential access to private funds can explain the greater effectiveness of assistance found in small firms.