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 current theories of contract and regulation. One important source of inefficiency of employment subsidies is non-additional employment and deadweight spending which occur when private firms receive a subsidy for jobs that would have been created without the subsidy. We identify the asymmetry of information between the government and the private firm as the source of these problems. When the government proposes optimal incentive contracts to promote employment, we show that all employment creations are additional and that the deadweight spending is equal to the information rent, which may be null when firms' types are discrete. (C) 2001 Elsevier Science B.V. All rights reserved.