Why do governments subsidise investment and not employment?
The governments of nearly all industrialised countries use subsidies to support the economic development of specific sectors or regions with high rates of unemployment. Conventional economic wisdom would suggest that the most efficient way to support these regions or sectors is to pay employment subsidies. We present evidence showing that capital subsidies are empirically much more important than employment subsidies. We then develop a simple model with unemployment to explain this phenomenon. In our model, unemployment arises due to bargaining between unions and heterogenous firms that differ with respect to their productivity. Union bargaining power raises wage costs and leads to a socially inefficient collapse of low productivity firms and a corresponding job loss. Union-firm bargaining also gives rise to underinvestment. It turns out that an investment subsidy dominates an employment subsidy in terms of welfare if there is bargaining over wages and employment on the firm level. If bargaining is over wages only, results are ambiguous but capital subsidies may still be preferable.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kolm, Ann-Sofie, 1998. "Differentiated payroll taxes, unemployment, and welfare," Journal of Public Economics, Elsevier, vol. 70(2), pages 255-271, November.
- Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
- Andrew Oswald, 1984.
"Efficient Contracts are on the Labour Demand Curve: Theory and Facts,"
555, Princeton University, Department of Economics, Industrial Relations Section..
- Oswald, Andrew J., 1993. "Efficient contracts are on the labour demand curve : Theory and facts," Labour Economics, Elsevier, vol. 1(1), pages 85-113, June.
- Oswald, A. J., 1995. "Efficient contracts are on the labour demand curve: Theory and facts," Labour Economics, Elsevier, vol. 2(1), pages 102-102, March.
- Sinn, Gerlinde & Sinn, Hans-Werner, 1992. "Kaltstart. Volkswirtschaftliche Aspekte der Deutschen Vereinigung," Monograph, Mohr Siebeck, Tübingen, edition 2, number urn:isbn:9783161459429, May.
- David Begg & Richard Portes, 1993.
"Eastern Germany since unification: wage subsidies remain a better way,"
The Economics of Transition,
The European Bank for Reconstruction and Development, vol. 1(4), pages 383-400, December.
- Begg, David & Portes, Richard, 1992. "Eastern Germany Since Unification: Wage Subsidies Remain a Better Way," CEPR Discussion Papers 730, C.E.P.R. Discussion Papers.
- Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-60, March.
- Austan Goolsbee, 1998.
"Investment Tax Incentives, Prices, And The Supply Of Capital Goods,"
The Quarterly Journal of Economics,
MIT Press, vol. 113(1), pages 121-148, February.
- Austan Goolsbee, 1997. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," NBER Working Papers 6192, National Bureau of Economic Research, Inc.
- Denny, K. & Nickell, S., 1990.
"Unions And Investment In British Industry,"
Economics Series Working Papers
9992, University of Oxford, Department of Economics.
- Clemens Fuest & Bernd Huber, 1998. "Why Do Countries Subsidize Investment and Not Employment?," NBER Working Papers 6685, National Bureau of Economic Research, Inc.
- Connolly, Robert A & Hirsch, Barry T & Hirschey, Mark, 1986. "Union Rent Seeking, Intangible Capital, and Market Value of the Firm," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 567-77, November.
- Sinn, Hans-Werner, 1995. "Factor Price Distortions and Public Subsidies in East Germany," CEPR Discussion Papers 1155, C.E.P.R. Discussion Papers.
- Anderson, Simon P & Devereux, Michael, 1988.
" Trade Unions and the Choice of Capital Stock,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 90(1), pages 27-44.
- Devereux, Michael B. & Lockwood, Ben, 1991.
"Trade unions, non-binding wage agreements, and capital accumulation,"
European Economic Review,
Elsevier, vol. 35(7), pages 1411-1426, October.
- Michael B. Devereux & Ben Lockwood, 1989. "Trade Unions, Non-Binding Wage Agreements, and Capital Accumulation," Working Papers 743, Queen's University, Department of Economics.
- MaCurdy, Thomas E & Pencavel, John H, 1986. "Testing between Competing Models of Wage and Employment Determination in Unionized Markets," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S3-S39, June.
- Svejnar, Jan, 1986.
"Bargaining Power, Fear of Disagreement, and Wage Settlements: Theory and Evidence from U.S. Industry,"
Econometric Society, vol. 54(5), pages 1055-78, September.
- Svejnar, J., 1984. "Bargaining power, fear of disagreement and wage settlements: theory and evidence from U.S. industry," CORE Discussion Papers 1984037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Gaute Torsvik, 1993. "Regional-incentive programs and the problem of time-inconsistent plans," Journal of Economics, Springer, vol. 58(2), pages 187-202, June.
- George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:78:y:2000:i:1-2:p:171-192. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.