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Equilibrium Effects of Firm Subsidies

Author

Listed:
  • Martin Rotemberg

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.

Suggested Citation

  • Martin Rotemberg, 2019. "Equilibrium Effects of Firm Subsidies," American Economic Review, American Economic Association, vol. 109(10), pages 3475-3513, October.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:10:p:3475-3513
    Note: DOI: 10.1257/aer.20171840
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    References listed on IDEAS

    as
    1. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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