We study how the interaction between economic openness and competitive selection affects the effectiveness of employment (and
entry) subsidisation. Within a two country heterogeneous-firms model with endogenous labour supply, we find that optimal employment
subsidies are always positive even though they can have pro- or anti-competitive effects on industry selection depending on
whether the economy is open or not. We also find that selection effects resulting from international competition and fiscal
externalities may imply that non-cooperative policies entail under-subsidisation of employment. Whilst always having procompetitive
selection effects on the industry, entry subsidies are shown to be less effective in raising employment and welfare than employment
subsidies.
Forschungsbereich:Industrie-, Innovations- und internationale Ökonomie