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Industrial policy in an imperfect world

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  • Hodler, Roland

Abstract

We study industrial policy and its effectiveness in a model with both market and government failures. We introduce a public agency responsible for industrial policy into the model of Hausmann and Rodrik [Hausmann, R., Rodrik, D., 2003. Development as Self-Discovery. Journal of Development Economics 72, 603-633], and we assume that this agency has limited information and political motives. In an extension, we further allow entrepreneurs to engage in rent seeking activities. We find that industrial policies are ineffective if the public agency is poorly informed, but not necessarily so if it is highly politically motivated. Given a politically motivated public agency, industrial policies are effective if and only if the institutional setting ensures that such policies are modest, e.g. by restricting the agency's budget. Moreover, our model helps us to understand why the same industrial policies that have failed elsewhere have been relatively successful in South Korea and Taiwan.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 90 (2009)
Issue (Month): 1 (September)
Pages: 85-93

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Handle: RePEc:eee:deveco:v:90:y:2009:i:1:p:85-93

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Web page: http://www.elsevier.com/locate/devec

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Keywords: Industrial policy; Market failures Government failures Rent seeking Political economics;

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Cited by:
  1. Ruta Aidis & Saul Estrin & Tomasz Mickiewicz, 2012. "Size matters: entrepreneurial entry and government," Small Business Economics, Springer, Springer, vol. 39(1), pages 119-139, July.
  2. Felipe Starosta De Waldemar, 2010. "How costly is rent-seeking to diversification : an empirical approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00461486, HAL.
  3. Estrin, Saul & Korosteleva, Julia & Mickiewicz, Tomasz, 2011. "Which Institutions Encourage Entrepreneurs to Create Larger Firms?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8247, C.E.P.R. Discussion Papers.

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