Equilibrium effects of firm subsidies

Martin Rotemberg

    Research output: Contribution to journalArticle

    Abstract

    Subsidy programs have two countervailing effects on firms: Direct gains for eligible firms and indirect losses for those whose competitors are eligible. In 2006, India changed the eligibility criteria for small-firm subsidies, and the sales of newly eligible firms grew by roughly 35 percent. Competitors of the newly eligible firms were affected, with almost complete crowd-out within products that were less internationally traded, but little crowd-out for more-traded products. The newly eligible firms had relatively high marginal products, so relaxing the eligibility criteria for subsidies increased aggregate productivity by around 1-2 percent. Targeting different firms could have led to similar gains.

    Original languageEnglish (US)
    Pages (from-to)3475-3513
    Number of pages39
    JournalAmerican Economic Review
    Volume109
    Issue number10
    DOIs
    StatePublished - Jan 1 2019

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    Subsidies
    Competitors
    Crowd-out
    India
    Targeting
    Marginal product
    Small firms
    Aggregate productivity

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Equilibrium effects of firm subsidies. / Rotemberg, Martin.

    In: American Economic Review, Vol. 109, No. 10, 01.01.2019, p. 3475-3513.

    Research output: Contribution to journalArticle

    Rotemberg, Martin. / Equilibrium effects of firm subsidies. In: American Economic Review. 2019 ; Vol. 109, No. 10. pp. 3475-3513.
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