Coupled vs. decoupled subsidies with heterogeneous firms in general equilibrium

Mark Gibson () and Jeff Luckstead

Journal of Applied Economics, 2017, vol. 20, 271-282

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.

Keywords: policy distortions; firm heterogeneity; productivity (search for similar items in EconPapers)
JEL-codes: L0 L2 L5 O4 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cem:jaecon:v:20:y:2017:n:2:p:271-282

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