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Optimal tax-subsidy policies for industrial adjustment to uncertain shocks

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  • BOADWAY, Robin W.
  • WILDASIN, David E.

Abstract

This paper analyzes the role of government policy when random shocks affect particular industries, occupations, or regions. Workers can freely choose an industry or occupation ex ante, and can relocate, but only at a cost, once uncertainty is resolved. The policy instruments available to the government are per capita taxes and subsidies. These are chosen either to maximize ex post utilitarian aggregate welfare, treating the initial assignment of workers as exogenously fixed (ex post optimal policy), or to maximize the ex ante expected utility of a representative workers, taking the effect of policy choice on the ex ante allocation of labor into account (ex ante optimal). Ex ante and ex post optimal policies are compared, with or without institutional constraints on the set of instruments. Optimal policies range from complete equalization of net incomes across workers to no equalizing transfers at all depending on the instruments available and the nature of relocation costs. Copyright 1990 by Royal Economic Society.
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Suggested Citation

  • BOADWAY, Robin W. & WILDASIN, David E., 1990. "Optimal tax-subsidy policies for industrial adjustment to uncertain shocks," LIDAM Reprints CORE 889, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:889
    Note: In : Oxford Economic Papers, 42, 105-134, 1990
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    Cited by:

    1. Augustine A. Osagiede & Virtue U. Ekhosuehi, 2015. "A theoretical framework for determining the appropriate level of subsidy in an economy," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 25(2), pages 19-34.
    2. Myers, Gordon M. & Papageorgiou, Yorgos Y., 1997. "Efficient Nash equilibria in a federal economy with migration costs," Regional Science and Urban Economics, Elsevier, vol. 27(4-5), pages 345-371, August.
    3. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    4. Boadway, Robin & Marceau, Nicolas & Marchand, Maurice, 1996. "Time-consistent subsidies to unlucky firms," European Journal of Political Economy, Elsevier, vol. 11(4), pages 619-634, April.
    5. Maxime C. Cohen & Ruben Lobel & Georgia Perakis, 2016. "The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption," Management Science, INFORMS, vol. 62(5), pages 1235-1258, May.
    6. Mitsui, Kiyoshi & Sato, Motohiro, 2001. "Ex ante free mobility, ex post immobility, and time consistency in a federal system," Journal of Public Economics, Elsevier, vol. 82(3), pages 445-460, December.
    7. Hans-Werner Sinn, 1996. "Social insurance, incentives and risk taking," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(3), pages 259-280, July.
    8. Motohiro Sato, 2000. "Fiscal Externalities and Efficient Transfers in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(2), pages 119-139, March.
    9. Linda Andersson, 2008. "Fiscal Flows and Financial Markets: To What Extent Do They Provide Risk Sharing within Sweden?," Regional Studies, Taylor & Francis Journals, vol. 42(7), pages 1003-1011.

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