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Subsidy competition, imperfect labor markets, and the endogenous entry of firms

Tadashi Morita (), Yukiko Sawada () and Kazuhiro Yamamoto ()
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Yukiko Sawada: Faculty of Economics, University of Tokyo
Kazuhiro Yamamoto: Graduate School of Economics, Osaka University

No 17-07, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper constructs a model of subsidy competition for manufactur- ing firms under labor market imperfections. Because subsidies affect the distribution of firms, they influence unemployment rates, the number of firms, and welfare. In our model, governments always provide inefficiently high subsidy rates to manufacturing firms. When labor market frictions are high, subsidy competition is beneficial, although subsidies under sub- sidy competition are inefficiently high. We show that an increase in labor market frictions always lowers welfare, whereas trade liberalization always improves welfare. Finally, we find that a rise in labor market friction in a country raises the equilibrium subsidy rate, affects unemployment rates, and lowers welfare.

Keywords: elastic Labor market friction; Unemployment; Subsidy competition (search for similar items in EconPapers)
JEL-codes: F10 J64 R10 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017-03
New Economics Papers: this item is included in nep-lab
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Working Paper: Subsidy Competition, Imperfect Labor Market, and Endogenous Entry of Firms (2016) Downloads
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