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Subsidy Competition, Imperfect Labor Market, and Endogenous Entry of Firms

Author

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  • MORITA Tadashi
  • SAWADA Yukiko
  • YAMAMOTO Kazuhiro

Abstract

This paper constructs a model of subsidy competition for manufacturing firms under the existence of labor market imperfection. Because subsidies affect the distribution of firms, they also affect unemployment rates, the number of firms, and welfare. In our model, governments invariably give inefficiently high rates of subsidy to manufacturing firms. When the labor market friction is large, subsidy competition is beneficial, although subsidies under subsidy competition are inefficiently high. We show that the increase in the labor market friction invariably lowers welfare, while trade liberalization always improves welfare. Finally, we study the effect of the increase in labor market friction in a country. The rise of labor market friction in a country raises the equilibrium subsidy rate, raises or lowers the unemployment rate, and lowers the welfare of this country.

Suggested Citation

  • MORITA Tadashi & SAWADA Yukiko & YAMAMOTO Kazuhiro, 2016. "Subsidy Competition, Imperfect Labor Market, and Endogenous Entry of Firms," Discussion papers 16096, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:16096
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    References listed on IDEAS

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    Cited by:

    1. MORITA Tadashi & OGAWA Yoshitomo & ONO Yoshiyasu, 2017. "Corporate Tax Competition in the Presence of Unemployment," Discussion papers 17118, Research Institute of Economy, Trade and Industry (RIETI).

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