Document Type

Working Paper

Publication Date


Working Paper Number

WP #12027, December 2012


Many developing countries have tried to increase firm provision of training by providing subsidies funded by taxes proportional to the firm's wage bill. These training funds, however, may backfire if the adverse effect of the tax on training incentives outweighs the positive effects of the subsidy. We show that the value of these training funds depends critically on the extent to which firms are liquidity constrained. If the effective firm discount rate is low, the disincentives outweigh the benefits. Using an administrative dataset on the Mauritius training fund, we show that larger, high-wage and more capital intensive firms are the most likely to offer to training without the subsidy, but that the subsidy creates an increased incentives for small firms to train. As a result, the largest firms pay more in taxes than they gain in subsidies while the smallest firms receive more benefits than they pay in taxes. Consequently, the program shifts net training investments away from the firms that would normally have the greatest return from training and toward smaller firms that would normally have the lowest return from training. It is doubtful that the program actually raises the incidence of training overall.

JEL Classification

M53, O15, O2, O55

File Format



29 pages

Included in

Economics Commons