The Effects of Subsidies on Firm Size and Productivity

Bearzotti, Enia and Polanec, Sašo and Bartolj, Tjaša (2023): The Effects of Subsidies on Firm Size and Productivity.

Abstract

This paper evaluates the impact of varying subsidy sizes and distinct program objectives on firm size and performance. The magnitude of treatment effects increases with subsidy size, although the marginal effects tend to decrease. We also find that treatment effects differ across subsidy programs due to their distinct objectives. Among these, labor-support measures are most effective at supporting employment, capital, and output while being most harmful to productivity. Contrary to theory, subsidies providing incentives for investments have no impact on capital or productivity. The treatment effects tend to decrease over time and are thus temporary. As recipient firms are more likely to receive additional support in the future, the effects of subsidies accumulate giving rise to permanent differences between subsidized and non-subsidized firms. However, the lack of productivity improvements in such firms questions the benefits of repeated supporting measures.

• Item Type: MPRA Paper
• Language: English
• Keywords: Subsidies, Firm Growth, Firm Performance, Industrial Policy
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; L - Industrial Organization > L5 - Regulation and Industrial Policy > L52 - Industrial Policy ; Sectoral Planning Methods

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