Competitive selection, trade, and employment: The strategic use of subsidies

Hassan Molana, Catia Montagna* (Corresponding Author)

*Corresponding author for this work

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Within a heterogeneous-firms model with endogenous labour supply, intra-industry competitive selection is shown to affect the impact of wage (and entry) subsidies. Optimal uniform wage subsidies are always positive even though, by reducing industry selectivity, they lower average productivity. Due to international selection and fiscal externalities, non-cooperative policies entail under-subsidisation of wages. Targeted (domestic-only or export) wage subsidies are dominated from a welfare point of view by a uniform subsidy. Whilst always having an opposite effect on average productivity, an optimal entry subsidy is shown to be less effective than an optimal uniform wage subsidy in raising employment and welfare.
Original languageEnglish
Pages (from-to)1154-1177
Number of pages24
JournalReview of International Economics
Issue number5
Early online date26 Jul 2018
Publication statusPublished - Nov 2018

Bibliographical note

We thank Holger Görg, Philipp Schröder, Fredrik Sjöholm, participants at the Danish International Economics Workshop, seminar participants at Aberdeen, Sheffield and Loughborough, three anonymous referees and the Editor of the journal, for helpful comments and suggestions. Funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 290647 is gratefully acknowledged.


  • optimal policy
  • wage subsidies
  • competitive selection
  • international trade


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