American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Equilibrium Effects of Firm Subsidies
American Economic Review
vol. 109,
no. 10, October 2019
(pp. 3475–3513)
Abstract
Subsidy programs have two countervailing effects on firms: direct gains for eligible firms and indirect losses for those whose competitors are eligible. In 2006, India changed the eligibility criteria for small-firm subsidies, and the sales of newly eligible firms grew by roughly 35 percent. Competitors of the newly eligible firms were affected, with almost complete crowd-out within products that were less internationally traded, but little crowd-out for more-traded products. The newly eligible firms had relatively high marginal products, so relaxing the eligibility criteria for subsidies increased aggregate productivity by around 1−2 percent. Targeting different firms could have led to similar gains.Citation
Rotemberg, Martin. 2019. "Equilibrium Effects of Firm Subsidies." American Economic Review, 109 (10): 3475–3513. DOI: 10.1257/aer.20171840Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- L25 Firm Performance: Size, Diversification, and Scope
- L52 Industrial Policy; Sectoral Planning Methods
- L60 Industry Studies: Manufacturing: General
- O14 Industrialization; Manufacturing and Service Industries; Choice of Technology