Export Subsidies, Productivity and Welfare under Firm-Level Heterogeneity

In this paper we use the monopolistic competition model with heterogeneous firms to study the effect of different policies on productivity and welfare, and provide three particular policies, which allow to reach the first best allocation in the economy. We also show that an export subsidy generates an increase in productivity, but - if policy already deals with the mark-up distortion that arises in this context (for example, through a subsidy on consumption of domestic varieties) - its effect on welfare is negative due to combination of falling variety and adverse terms of trade changes.