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

Author

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  • Hassan Molana
  • Catia Montagna
Abstract
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.

Suggested Citation

  • Hassan Molana & Catia Montagna, 2018. "Competitive selection, trade, and employment: The strategic use of subsidies," Review of International Economics, Wiley Blackwell, vol. 26(5), pages 1154-1177, November.
    • Handle: RePEc:bla:reviec:v:26:y:2018:i:5:p:1154-1177
    DOI: 10.1111/roie.12354
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    References listed on IDEAS

    as
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