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The Dynamic Effects of Subsidizing the Tourism Sector

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  • Schubert, Stefan Franz
  • Brida, Juan Gabriel

Abstract

The paper studies the short run and long run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought as a region within a country. We introduce a two-sector dynamic general equilibrium model where the tourism sector is considered to be labor-intensive and produces traded services. The other sector is capital-intensive and produces a nontraded good, which is also used for capital accumulation. Labor and capital can freely move between sectors. Economic decisions are made by forward-looking representative agents, which optimize their intertemporal welfare by choosing consumption of both the nontraded good and tourism services, the sectoral allocation of labor, and the rate of wealth accumulation. We discuss the short run, dynamic and long run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated, and production of tourism is falling. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the nontraded good drops.

Suggested Citation

  • Schubert, Stefan Franz & Brida, Juan Gabriel, 2008. "The Dynamic Effects of Subsidizing the Tourism Sector," MPRA Paper 16755, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:16755
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    References listed on IDEAS

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    Cited by:

    1. Roberto Gabriele & Enrico Tundis, 2015. "Contesto regionale, struttura economica e impatto delle politiche regionali: il caso degli alberghi in Trentino," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2015(3 Suppl.), pages 37-59.
    2. Roberto Gabriele, & Enrico Tundis, & Enrico Zaninotto, 2015. "Public Subsidies and Development of Hotel Industry: Evidence from a Place-based Policy," DEM Discussion Papers 2015/10, Department of Economics and Management.
    3. Schubert, Stefan Franz & Brida, Juan Gabriel, 2009. "A Dynamic Model of Economic Growth in a Small Tourism Driven Economy," MPRA Paper 16737, University Library of Munich, Germany.
    4. Juan Gabriel Brida & Silvia London & Mara Rojas, 2013. "A Dynamic Model of Tourism and Economic Growth: the Role of Physical and Human Capital," Economics Bulletin, AccessEcon, vol. 33(2), pages 1361-1373.
    5. Leyi Zheng & Junfeng Liu & Qiong Yang & Yuqing Wang & Ying Liu & Xiurong Hu & Jianying Hu & Yi Wan & Xuejun Wang & Jianmin Ma & Xilong Wang & Shu Tao, 2023. "The Impacts of China’s Resident Tourism Subsidy Policy on the Economy and Air Pollution Emissions," Sustainability, MDPI, vol. 15(10), pages 1-16, May.
    6. Stefan F. Schubert, 2016. "A short-run model of a two-sector economy with tourism and unemployment," Tourism Economics, , vol. 22(4), pages 763-778, August.
    7. Stauvermann, Peter Josef & Kumar, Ronald Ravinesh, 2016. "Economics of tourism & growth for small island countries," Tourism Management, Elsevier, vol. 55(C), pages 272-275.
    8. David Perrain & Philippe Jean-Pierre, 2020. "Tourisme et croissance économique dans les petites économies insulaires : à l'épreuve des modèles à seuil," Working Papers hal-02462562, HAL.
    9. Roberto Gabriele & Enrico Tundis, 2015. "the effect of longitudinal multiple subsidies on firm performance in the presence of neighbour interactions," ERSA conference papers ersa15p1368, European Regional Science Association.
    10. Stauvermann, Peter Josef & Kumar, Ronald Ravinesh, 2017. "Productivity growth and income in the tourism sector: Role of tourism demand and human capital investment," Tourism Management, Elsevier, vol. 61(C), pages 426-433.
    11. Stefan F. Schubert, 2010. "Coping with Externalities in Tourism: A Dynamic Optimal Taxation Approach," Tourism Economics, , vol. 16(2), pages 321-343, June.
    12. Bernini, Cristina & Pellegrini, Guido, 2013. "Is subsidising tourism firms an effective use of public funds?," Tourism Management, Elsevier, vol. 35(C), pages 156-167.
    13. Peter Josef Stauvermann & Ronald Ravinesh Kumar, 2017. "Modeling economic growth with tourism for small open economies," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 1001-1018, November.
    14. David Perrain & Philippe Jean-Pierre, 2019. "The smart destination strategy, a key factor for changes in vulnerable tourist destinations? [La stratégie de destination intelligente, facteur clé des mutations des destinations touristiques vulné," Post-Print hal-02144769, HAL.

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    More about this item

    Keywords

    dynamic open economy two-sector model; tourism; subsidies; deindustrialization;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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