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Well-Intended Policies

  • Yongseok Shin

    (Washington University)

  • Benjamin Moll

    (Princeton University)

  • Francisco J. Buera

    (UCLA)

In our model, short-sighted policy-makers choose to subsidize productive entrepreneurs to relax their limited commitments. In the short-run, this policy reallocates capital from unproductive towards productive entrepreneurs, and boosts per-capita income, TFP and capital accumulation. Over time, as the productivities of entrepreneurs revert to the mean, subsidized individuals are not necessarily the most productive entrepreneurs, while newly entering, productive entrepreneurs are taxed. Therefore, in the long-run the initial policy results in idiosyncratic taxes and subsidies that contribute to misallocating capital from productive entrepreneurs towards unproductive ones who stay in business only because they are subsidized. Because of mean reversion, in the stationary equilibrium, subsidies are uncorrelated with the productivities of the overall population. However, subsidies are correlated with the productivity of individuals that choose to be entrepreneurs. These endogenous idiosyncratic distortions lead to lower per-capita income, TFP and capital accumulation in the long-run.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1244.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1244
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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