Selection, Trade and Employment: The Strategic Use of Subsidies

University of Aberdeen Business School, Discussion Paper in Economics 2015-9

37 Pages Posted: 26 Mar 2016

See all articles by Hassan Molana

Hassan Molana

University of Dundee

Catia Montagna

University of Aberdeen; SIRE; GEP, Nottingham

Date Written: November 21, 2015

Abstract

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

Keywords: optimal policy, employment subsidies, competitive selection, international trade

JEL Classification: E61, F12, F42

Suggested Citation

Molana, Hassan and Montagna, Catia, Selection, Trade and Employment: The Strategic Use of Subsidies (November 21, 2015). University of Aberdeen Business School, Discussion Paper in Economics 2015-9. Available at SSRN: https://ssrn.com/abstract=2754513 or http://dx.doi.org/10.2139/ssrn.2754513

Hassan Molana

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom
01382 344375 (Phone)

Catia Montagna (Contact Author)

University of Aberdeen ( email )

Business School
Edward Wright Building
Aberdeen, Scotland AB243QJ
United Kingdom
+44 1224 273690 (Phone)

SIRE ( email )

First floor - Room 1.10
31 Buccleuch Place
Edinburgh, Scotland EH8 9JT
United Kingdom

GEP, Nottingham ( email )

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