Caio Machado

Uneven Recessions and Optimal Firm Subsidies

Abstract: This paper studies optimal firm subsidies after negative supply shocks directly affect some firms but not others. I first propose a model with aggregate demand externalities: the higher the aggregate output, the higher the demand faced by a given firm. Negative supply shocks to a subset of firms (uneven shocks) then act as negative demand shocks to all firms in the economy. A sufficiently large uneven shock initiates a business closure cascade, in which even firms not directly hit by the shock stop operating. Since such cascades are inefficient, I then ask how to optimally distribute subsidies to achieve the first best at the minimal cost. I show that the optimal policy requires subsidies to vary across firms, even if firms are very similar. If shocks are not too large, the optimal policy only subsidizes the firms that did not face supply shocks. For large shocks, the main target depends on the elasticity of substitution: If the complementarity across the varieties produced by firms is high, firms facing supply shocks should be prioritized and if the complementarity is low, the opposite is true.

Datos del Seminario

Fecha de inicio:
24 de Junio, 2022 | 12:00 hrs.

Fecha de término
24 de Junio, 2022 | 13:00 hrs.