Who wins and who loses from state subsidies?

Du, Jun; Girma, Sourafel; Görg, Holger; Stepanok, Ignat

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.

Citation

Du, J., Girma, S., Görg, H., & Stepanok, I. (2023). Who wins and who loses from state subsidies?. Canadian Journal of Economics / Revue Canadienne d'Économique, 56(3), 1007-1031. https://doi.org/10.1111/caje.12644

• Journal Article Type: Article
• Acceptance Date: Aug 18, 2022
• Online Publication Date: Feb 1, 2023
• Publication Date: 2023-08
• Deposit Date: Feb 15, 2023
• Publicly Available Date: Feb 21, 2023
• Journal: Canadian Journal of Economics/Revue canadienne d'économique
• Print ISSN: 0008-4085
• Electronic ISSN: 1540-5982
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 56
• Issue: 3
• Pages: 1007-1031
• DOI: https://doi.org/10.1111/caje.12644
• Keywords: Economics and Econometrics
• Public URL: https://nottingham-repository.worktribe.com/output/15435668
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/caje.12644
• Additional Information: 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.