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 language | English (US) |
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Title of host publication | International Economic Integration and Domestic Performance |
Publisher | World Scientific Publishing Co. Pte Ltd |
Pages | 39-58 |
Number of pages | 20 |
ISBN (Electronic) | 9789813141094 |
ISBN (Print) | 9789813141087 |
DOIs | |
State | Published - Feb 27 2017 |
Keywords
- Capital mobility
- Factor subsidies
- Increasing returns
ASJC Scopus subject areas
- General Economics, Econometrics and Finance
- General Business, Management and Accounting