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Uneven recessions and optimal firm subsidies

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  • Machado, Caio

Abstract

How should policymakers distribute firm subsidies when supply shocks hit some firms and spill over to others through demand externalities? I propose a model to answer that question. The optimal policy depends on the severity of the supply shock and the degree of substitution across goods. If shocks are not too large or widespread, it is optimal to subsidize only firms not hit by supply shocks. For larger and more widespread shocks, the results depend on the elasticity of substitution: If complementarities across the varieties produced by firms are high, firms facing supply shocks should be prioritized, and the opposite is true if complementarities are low.

Suggested Citation

  • Machado, Caio, 2024. "Uneven recessions and optimal firm subsidies," Journal of Public Economics, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:pubeco:v:239:y:2024:i:c:s0047272724001865
    DOI: 10.1016/j.jpubeco.2024.105250
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    References listed on IDEAS

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    More about this item

    Keywords

    Firm subsidies; Demand externalities; Uneven shocks;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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