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Who wins and who loses from state subsidies?

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

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Authors

Jun Du

SOURAFEL GIRMA SOURAFEL.GIRMA@NOTTINGHAM.AC.UK
Professor of Industrial Economics

Holger Görg

Ignat Stepanok



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.

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