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Competitive selection, trade, and employment: The strategic use of subsidies
Author(s) -
Molana Hassan,
Montagna Catia
Publication year - 2018
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12354
Subject(s) - subsidy , economics , wage , welfare , externality , productivity , labour economics , selection (genetic algorithm) , export subsidy , microeconomics , macroeconomics , market economy , artificial intelligence , computer science
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.