Coupled Vs. Decoupled Subsidies with Heterogeneous Firms in General Equilibrium

Mark Gibson () and Jeff Luckstead

Journal of Applied Economics, 2017, vol. 20, issue 2, 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.

Date: 2017
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DOI: 10.1016/S1514-0326(17)30012-0

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