On the dynamic response of a firm to an employment subsidy with a fmd threshold

Mark Montgomery, Charles A. Wilson

    Research output: Contribution to journalArticle

    Abstract

    During the last two decades, policy-makers have included employment subsidies among the tools of stabilization policy. Employment subsidy programs have been introduced in Japan, Great Britain, Europe and the United States. There has been some concern, however, about the effectiveness of such programs. In this paper, we analyze how a profit-maximizing firm will respond to a marginal subsidy program with a fixed threshold, focusing on the role of inventories. We show that, in some cases, the firm may have an incentive to manipulate inventories in a way that increases its profits but lowers the cost effectiveness of the program.

    Original languageEnglish (US)
    Pages (from-to)405-422
    Number of pages18
    JournalJournal of Economic Dynamics and Control
    Volume9
    Issue number4
    DOIs
    StatePublished - Dec 1985

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Control and Optimization
    • Applied Mathematics

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