Who wins and who loses from state subsidies?

Abstract

China is perceived to rely on subsidizing firms in targeted industries to improve their performance and stay competitive. We implement an approach that allows for the joint estimation of direct and indirect effects of subsidies on subsidized and non‐subsidized firms. We find that firms that receive subsidies experience a boost in productivity. However, our approach highlights the importance of indirect effects, which are generally neglected in the literature. We find that, in general but not always, non‐subsidized firms experience reductions in their productivity growth if they operate in a cluster where other firms are subsidized. These negative externalities depend on the share of firms that receive subsidies in the cluster. Aggregating direct and indirect effects into a (weighted) total effect shows that this negative indirect effect tends to dominate. We interpret our results in light of a simple heterogenous firm model, which highlights that subsidization in a competitive environment of firms may potentially harm non‐subsidized firms.

Publication DOI: https://doi.org/10.1111/caje.12644
Divisions: ?? RG1022 ??
College of Business and Social Sciences > Aston Business School > Economics, Finance & Entrepreneurship
College of Business and Social Sciences > Aston Business School
Additional Information: Copyright © 2023 The Authors. Canadian Journal of Economics/Revue canadienne d'économique published by Wiley Periodicals LLC on behalf of Canadian Economics Association. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Uncontrolled Keywords: H25,H32,L25,Article,Articles
Publication ISSN: 1540-5982
Full Text Link:
Related URLs: https://onlinel ... 1111/caje.12644 (Publisher URL)
PURE Output Type: Article
Published Date: 2023-02-01
Published Online Date: 2023-02-01
Accepted Date: 2022-08-18
Submitted Date: 2021-05-26
Authors: Du, Jun (ORCID Profile 0000-0002-0449-4437)
Girma, Sourafel
Görg, Holger
Stepanok, Ignat

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