Uneven recessions and optimal firm subsidies

Caio Machado

Journal of Public Economics, 2024, vol. 239, issue C

Abstract: How should policymakers distribute firm subsidies when supply shocks hit some firms and spill over to others through demand externalities? I propose a model to answer that question. The optimal policy depends on the severity of the supply shock and the degree of substitution across goods. If shocks are not too large or widespread, it is optimal to subsidize only firms not hit by supply shocks. For larger and more widespread shocks, the results depend on the elasticity of substitution: If complementarities across the varieties produced by firms are high, firms facing supply shocks should be prioritized, and the opposite is true if complementarities are low.

Keywords: Firm subsidies; Demand externalities; Uneven shocks (search for similar items in EconPapers)
JEL-codes: D60 E60 H25 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:239:y:2024:i:c:s0047272724001865

DOI: 10.1016/j.jpubeco.2024.105250

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