Equilibrium effects of firm subsidies

Martin Rotemberg

    Research output: Contribution to journalArticlepeer-review


    Subsidy programs have two countervailing effects on firms: Direct gains for eligible firms and indirect losses for those whose competitors are eligible. In 2006, India changed the eligibility criteria for small-firm subsidies, and the sales of newly eligible firms grew by roughly 35 percent. Competitors of the newly eligible firms were affected, with almost complete crowd-out within products that were less internationally traded, but little crowd-out for more-traded products. The newly eligible firms had relatively high marginal products, so relaxing the eligibility criteria for subsidies increased aggregate productivity by around 1-2 percent. Targeting different firms could have led to similar gains.

    Original languageEnglish (US)
    Pages (from-to)3475-3513
    Number of pages39
    JournalAmerican Economic Review
    Issue number10
    StatePublished - Oct 2019

    ASJC Scopus subject areas

    • Economics and Econometrics


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