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Government Subsidy, Resource Misallocation and Manufacturing Productivity

【Authors】
JIN Xiaoyu
【WorkUnit】
Chongqing University of Technology, 400050
【Abstract】

Government subsidy on firms changes extensive and intensive margins of market, results in misallocation of resources between firms and reduces manufacturing productivity. Using panel data of Chinese manufacturing firms from 1998 to 2007, this paper studies the effect and mechanism of misallocation caused by subsidy on manufacturing productivity. Decomposition of manufacturing productivity demonstrates the resource misallocation between firms and decreases manufacturing productivity. Empirical study shows that government subsidy is an important factor inducing this resource misallocation. Subsidy changes extensive and intensive margins of market, distorts resource allocation between firms and reduces manufacturing productivity, and the resource misallocation is more serious in industries with higher proportions of state-owned assets. Specifically, subsidy hinders firms' entry and exit in extensive margins, but helps the subsidized firms to expand the scale and crowd out the market share of unsubsidized firms in intensive margins. This paper implies that the government should take all firms into consideration in a frame of general equilibrium when developing subsidy policies.


JEL:H23, H25, H32


【KeyWords】
Government Subsidy, Resources Misallocation, Manufacturing Productivity