Designing an efficient subsidy: Evidence from the Emergency Gold Mining Assistance Act

Abstract

A firm-level dataset of Canadian gold mines is used to evaluate the efficacy of a large-scale mid-twentieth century government subsidy program. In 1948, faced with the perceived imminent collapse of the Canadian gold mining industry, due to rapidly falling profits, the Canadian government instituted a decades-long subsidy program, costing $2.79 billion (2020 Canadian dollars) over its lifetime. The goal of the subsidy was to increase firm profits to prevent their closure and thus ensure the economic survival of communities which were heavily reliant on the industry. Cost curves for individual gold mines are estimated and reveal that the subsidy would not be expected to have any impact on the output of a mine, but rather only on its decision to exit the market. The subsidy only succeeded in preventing a 20% drop in the size of the workforce, at a yearly cost of $31,000 to $42,000 per worker. Through an examination of alternative program designs, it is shown that a better designed policy could have achieved the same impact at merely a fifth of the cost.