Minor-Firm Support and Macroeconomic Outcomes

Daisuke Matsuzaki and Yoshiyasu Ono

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: The question of whether to support low-productivity firms is usually answered based on productivity because the possibility of aggregate demand shortages is assumed away. We revisit this question using a monetary general-equilibrium model that allows for persistent demand shortages, where one sector consists of Cournot oligopolists with varying levels of productivity and the rest is competitive. We find that improving the productivity of a lowproductivity firm in the oligopoly sector and allowing it to remain in the market increase employment and consumption under stagnation, despite impeding the production activities of more e!cient firms. This occurs because supporting a low-productivity firm reduces the economy’s aggregate productivity, which narrows the deflationary gap and induces households to increase consumption. This mechanism is specific to demand-constrained economies; in the absence of aggregate demand shortages, the conventional e!ciency-based prescription is restored, and low-productivity firms should be encouraged to exit. Thus, under stagnation, whether to support low-productivity firms should be judged not from an e!ciency standpoint but from the perspective of stimulating consumption.

Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1323

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