Infant Firm Subsidization in Industries with Dynamic Structure

Journal of Industry Competition and Trade, Vol. 7, No. 2, pp. 73-93, 2007

Posted: 12 Dec 2009

See all articles by Vladimir Petkov

Vladimir Petkov

Victoria University of Wellington - School of Economics & Finance

Date Written: 2007

Abstract

This paper analyzes time-consistent subsidies in industries with strong learning effects and frequent entry and exit. Structural dynamics create opportunities for strategic behavior: by influencing government policies, infant firms can reduce their tax burden and weaken future competitors. Two balanced-budget subsidy regimes are considered: (1) intra-industry redistribution; and (2) outside funding. We show that the choice of funding method does not affect equilibrium welfare. In both cases, the regulator is able to attain the constrained optimum. This result does not depend on the functional form of payoffs and holds in both price and quantity games. In linear-quadratic examples, we compute the equilibrium strategies. We show that (1) government intervention amplifies transitional price and output fluctuations and (2) the steady-state subsidy rate and infant production are decreasing in the speed of learning.

Keywords: Subsidies, Structural dynamics, Strategic behaviour

JEL Classification: L50, L13, C73

Suggested Citation

Petkov, Vladimir, Infant Firm Subsidization in Industries with Dynamic Structure (2007). Journal of Industry Competition and Trade, Vol. 7, No. 2, pp. 73-93, 2007. Available at SSRN: https://ssrn.com/abstract=1521820

Vladimir Petkov (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

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