Job additionality and deadweight spending in perfectly competitive industries: the case for optimal employment subsidies

This paper links the old literature on employment subsidies with the curren t theories of contract and regulation. One important source of inefficiency of employment subsidies is non-additional employment and deadweight spendi ng which occur when private firms receive a subsidy for jobs that would hav e been created without the subsidy. We identify the asymmetry of informatio n between the government and the private firm as the source of these proble ms. When the government proposes optimal incentive contracts to promote emp loyment, we show that all employment creations are additional and that the deadweight spending is equal to the information rent, which may be null whe n firms' types are discrete. (C) 2001 Elsevier Science B.V. All rights rese rved.