Coupled Vs. Decoupled Subsidies with Heterogeneous Firms in General Equilibrium. Issue 2 (1st November 2017)

• Record Type: Journal Article
• Authors: Gibson, Mark J.; Luckstead, Jeff
• Is Part Of: Journal of applied economics. Volume 20:Issue 2(2017)
• Page Start: 271
• Page End: 282
• Publication Date: 2017-11-01
• Subjects: O4 -- L0 -- L2 -- L5; policy distortions -- firm heterogeneity -- productivity; Economics -- Periodicals; Economic policy -- Periodicals; Finance -- Periodicals; Economic policy; Economics; Finance; Electronic journals; Electronic journal; Periodicals; 330.05
• DOI: 10.1016/S1514-0326(17)30012-0
• Languages: English
• ISSNs: 1514-0326

Abstract

Abstract : We develop a competitive general equilibrium model with heterogeneous firms and endogenous entry and exit to contrast the effects of coupled and decoupled subsidies. Unlike coupled subsidies, decoupled subsidies are not tied to a producer's level of output, so they are thought to be less distortive. We challenge this view by proving that, in a model with endogenous TFP, coupled subsidies have no effect on TFP while decoupled subsidies have a negative effect. Moreover, our numerical experiments show that, for a given level of government expenditure, decoupled subsidies can lower welfare more than coupled subsidies.