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Coupled vs. decoupled subsidies with heterogeneous firms in general equilibrium

Author

Listed:
  • Mark J. Gibson

    (Washington State University)

  • Jeff Luckstead

    (University of Arkansas)

Abstract

We develop a competitive general equilibrium model with heterogeneous firms and endogenous entry and exit to contrast the effects of coupled and decoupled subsidies. Unlike coupled subsidies, decoupled subsidies are not tied to a producer’s level of output, so they are thought to be less distortive. We challenge this view by proving that, in a model with endogenous TFP, coupled subsidies have no effect on TFP while decoupled subsidies have a negative effect. Moreover, our numerical experiments show that, for a given level of government expenditure, decoupled subsidies can lower welfare more than coupled subsidies.

Suggested Citation

  • Mark J. Gibson & Jeff Luckstead, 2017. "Coupled vs. decoupled subsidies with heterogeneous firms in general equilibrium," Journal of Applied Economics, Universidad del CEMA, vol. 20, pages 271-282, November.
    • Handle: RePEc:cem:jaecon:v:20:y:2017:n:2:p:271-282
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    File URL: https://ucema.edu.ar/publicaciones/download/volume20/gibson.pdf
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    Cited by:

    1. Devadoss, Stephen & Gibson, Mark J. & Luckstead, Jeff, 2016. "The Impact of Agricultural Subsidies on the Corn Market with Farm Heterogeneity and Endogenous Entry and Exit," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(3), pages 1-20, September.
    2. You-hua Chen & Zhuang Zhang & Ashok K. Mishra, 2023. "A flexible and efficient hybrid agricultural subsidy design for promoting food security and safety," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-8, December.

    More about this item

    Keywords

    policy distortions; firm heterogeneity; productivity;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • L0 - Industrial Organization - - General
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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