Playing by the new subsidy rules: Capital subsidies as substitutes for sectoral subsidies

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

In a small, open economy characterized by an increasing-returns sector and foreignowned capital, a sector-specific instrument generally is needed to achieve the optimum. A capital subsidy alone can be used for decentralization, however, when the optimal production plan is specialization in the externality-generating activity. The effect of a capital subsidy on home income and its distribution depends on the pattem of production and the share of domestic capital that is foreign owned. In a diversified economy, a subsidy benefits capital owners, harms labor and raises national income only if foreign capital ownership is sufficiently small. In a specialized economy, a subsidy may raise national income even if all domestic capital is foreign owned a.nd, if it does, both labor and capital owners gain. Thus, a capital subsidy may be an attractive replacement for sector-specific subsidies proscribed by international agreements.

Original languageEnglish (US)
Title of host publicationInternational Economic Integration and Domestic Performance
PublisherWorld Scientific Publishing Co. Pte Ltd
Pages39-58
Number of pages20
ISBN (Electronic)9789813141094
ISBN (Print)9789813141087
DOIs
StatePublished - Feb 27 2017

Keywords

  • Capital mobility
  • Factor subsidies
  • Increasing returns

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

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  • Cite this

    Lovely, M. E. (2017). Playing by the new subsidy rules: Capital subsidies as substitutes for sectoral subsidies. In International Economic Integration and Domestic Performance (pp. 39-58). World Scientific Publishing Co. Pte Ltd. https://doi.org/10.1142/9789813141094_0003