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

Research output: Chapter in Book/Entry/PoemChapter


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
Number of pages20
ISBN (Electronic)9789813141094
ISBN (Print)9789813141087
StatePublished - Feb 27 2017


  • Capital mobility
  • Factor subsidies
  • Increasing returns

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance
  • General Business, Management and Accounting


Dive into the research topics of 'Playing by the new subsidy rules: Capital subsidies as substitutes for sectoral subsidies'. Together they form a unique fingerprint.

Cite this