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Selection, Trade, and Employment: The Strategic Use of Subsidies

Author

Listed:
  • Hassan Molana
  • Catia Montagna

Abstract

We study how the interaction between economic openness and competitive selection affects the effectiveness of employment and entry subsidisation. Within a heterogeneous-firms model with endogenous labour supply, optimal employment subsidies are shown to have pro- or anti-competitive effects on industry selection depending on whether the economy is open or not. Selection effects resulting from international competition and fiscal externalities imply that non-cooperative policies may entail under-subsidisation of employment. Entry subsidies always have pro-competitive selection effects on the industry, but are shown to be less effective in raising employment and welfare than employment subsidies.

Suggested Citation

  • Hassan Molana & Catia Montagna, 2016. "Selection, Trade, and Employment: The Strategic Use of Subsidies," Dundee Discussion Papers in Economics 296, Economic Studies, University of Dundee.
    • Handle: RePEc:dun:dpaper:296
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    File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_296.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    optimal policy; employment subsidies; competitive selection; international trade;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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