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Subsidy competition, imperfect labor markets, and the endogenous entry of firms

Author

Listed:
  • Tadashi Morita

    () (Faculty of Economics, Kindai University)

  • Yukiko Sawada

    () (Faculty of Economics, University of Tokyo)

  • Kazuhiro Yamamoto

    () (Graduate School of Economics, Osaka University)

Abstract

This paper constructs a model of subsidy competition for manufactur- ing firms under labor market imperfections. Because subsidies affect the distribution of firms, they influence unemployment rates, the number of firms, and welfare. In our model, governments always provide inefficiently high subsidy rates to manufacturing firms. When labor market frictions are high, subsidy competition is beneficial, although subsidies under sub- sidy competition are inefficiently high. We show that an increase in labor market frictions always lowers welfare, whereas trade liberalization always improves welfare. Finally, we find that a rise in labor market friction in a country raises the equilibrium subsidy rate, affects unemployment rates, and lowers welfare.

Suggested Citation

  • Tadashi Morita & Yukiko Sawada & Kazuhiro Yamamoto, 2017. "Subsidy competition, imperfect labor markets, and the endogenous entry of firms," Discussion Papers in Economics and Business 17-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:1707
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    References listed on IDEAS

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    More about this item

    Keywords

    elastic Labor market friction; Unemployment; Subsidy competition;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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