This paper examines the effects of factor subsidies on capital formation and employment in an OLG small open economy model of wealth accumulation. Two cases are explored, one with neoclassical wages and one with incentive-wages. We show that in the neoclassical model a capital subsidy spurs capital and causes a temporary increase in manhours which vanishes in the long-run, while a labor subsidy may temporarily increase inputs, but is neutral for steady state capital and labor. In the incentive-wage economy, a capital subsidy boosts investment and aggravates unemployment, while a labor subsidy stimulates employment and will in some conditions depress capital formation.

Capital Subsidies versus Labor Subsidies: A Trade-off between Capital and Employment? / Petrucci, Alberto; Phelps, E. S.. - In: JOURNAL OF MONEY, CREDIT, AND BANKING. - ISSN 0022-2879. - 4:(2005), pp. ---.

Capital Subsidies versus Labor Subsidies: A Trade-off between Capital and Employment?

PETRUCCI, ALBERTO;
2005

Abstract

This paper examines the effects of factor subsidies on capital formation and employment in an OLG small open economy model of wealth accumulation. Two cases are explored, one with neoclassical wages and one with incentive-wages. We show that in the neoclassical model a capital subsidy spurs capital and causes a temporary increase in manhours which vanishes in the long-run, while a labor subsidy may temporarily increase inputs, but is neutral for steady state capital and labor. In the incentive-wage economy, a capital subsidy boosts investment and aggravates unemployment, while a labor subsidy stimulates employment and will in some conditions depress capital formation.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/3173
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