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The Dynamic Effects of Subsidizing the Tourism Sector

Author

Listed:
  • Schubert, Stefan Franz
  • Brida, Juan Gabriel

Abstract

The paper studies the short run and long run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought as a region within a country. We introduce a two-sector dynamic general equilibrium model where the tourism sector is considered to be labor-intensive and produces traded services. The other sector is capital-intensive and produces a nontraded good, which is also used for capital accumulation. Labor and capital can freely move between sectors. Economic decisions are made by forward-looking representative agents, which optimize their intertemporal welfare by choosing consumption of both the nontraded good and tourism services, the sectoral allocation of labor, and the rate of wealth accumulation. We discuss the short run, dynamic and long run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated, and production of tourism is falling. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the nontraded good drops.

Suggested Citation

  • Schubert, Stefan Franz & Brida, Juan Gabriel, 2008. "The Dynamic Effects of Subsidizing the Tourism Sector," MPRA Paper 16755, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:16755
    as

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    File URL: https://mpra.ub.uni-muenchen.de/16755/1/MPRA_paper_16755.pdf
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    References listed on IDEAS

    as
    1. Jean-Jacques Nowak & Mondher Sahli & Pasquale M. Sgro, 2003. "Tourism, Trade And Domestic Welfare," Pacific Economic Review, Wiley Blackwell, vol. 8(3), pages 245-258, October.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Turnovsky Stephen J. & Sen Partha, 1995. "Investment in a Two-Sector Dependent Economy," Journal of the Japanese and International Economies, Elsevier, vol. 9(1), pages 29-55, March.
    4. M. Thea Sinclair, 1998. "Tourism and economic development: A survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(5), pages 1-51.
    5. Pasquale M. Sgro & Chi-Chur Chao & Bharat R. Hazari & Jean-Pierre Laffargue & Eden S. H. Yu, 2005. "Tourism, Jobs, Capital Accumulation and the Economy: A Dynamic Analysis," Working Papers 2005.136, Fondazione Eni Enrico Mattei.
    6. Schubert, Stefan F & Turnovsky, Stephen J, 2002. "The Dynamics of Temporary Policies in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 604-622, November.
    7. Brock, William A & Turnovsky, Stephen J, 1981. "The Analysis of Macroeconomic Policies in Perfect Foresight Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 179-209, February.
    8. Marie-Antoinette Maupertuis & L. Dwyer & J.-J. Nowak & M. Sahli, 2007. "Tourism Economics," Post-Print halshs-00635048, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Roberto Gabriele & Enrico Tundis, 2015. "Contesto regionale, struttura economica e impatto delle politiche regionali: il caso degli alberghi in Trentino," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2015(3 Suppl.), pages 37-59.
    2. Roberto Gabriele, & Enrico Tundis, & Enrico Zaninotto, 2015. "Public Subsidies and Development of Hotel Industry: Evidence from a Place-based Policy," DEM Discussion Papers 2015/10, Department of Economics and Management.
    3. Schubert, Stefan Franz & Brida, Juan Gabriel, 2009. "A Dynamic Model of Economic Growth in a Small Tourism Driven Economy," MPRA Paper 16737, University Library of Munich, Germany.
    4. Roberto Gabriele & Enrico Tundis, 2015. "the effect of longitudinal multiple subsidies on firm performance in the presence of neighbour interactions," ERSA conference papers ersa15p1368, European Regional Science Association.
    5. repec:eee:touman:v:61:y:2017:i:c:p:426-433 is not listed on IDEAS
    6. Schubert, Stefan Franz, 2009. "Coping with Externalities in Tourism - A Dynamic Optimal Taxation Approach," MPRA Paper 16736, University Library of Munich, Germany.
    7. repec:eee:touman:v:35:y:2013:i:c:p:156-167 is not listed on IDEAS
    8. Juan Gabriel Brida & Silvia London & Mara Rojas, 2013. "A Dynamic Model of Tourism and Economic Growth: the Role of Physical and Human Capital," Economics Bulletin, AccessEcon, vol. 33(2), pages 1361-1373.
    9. repec:bla:metroe:v:68:y:2017:i:4:p:1001-1018 is not listed on IDEAS
    10. repec:eee:touman:v:55:y:2016:i:c:p:272-275 is not listed on IDEAS

    More about this item

    Keywords

    dynamic open economy two-sector model; tourism; subsidies; deindustrialization;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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