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Infant Firm Subsidization in Industries with Dynamic Structure

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  • Vladimir Petkov

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Abstract

This paper analyzes time-consistent subsidies in industries with strong learning effects and frequent entry and exit. Structural dynamics create opportunities for strategic behavior: by influencing government policies, infant firms can reduce their tax burden and weaken future competitors. Two balanced-budget subsidy regimes are considered: (1) intra-industry redistribution; and (2) outside funding. We show that the choice of funding method does not affect equilibrium welfare. In both cases, the regulator is able to attain the constrained optimum. This result does not depend on the functional form of payoffs and holds in both price and quantity games. In linear-quadratic examples, we compute the equilibrium strategies. We show that (1) government intervention amplifies transitional price and output fluctuations and (2) the steady-state subsidy rate and infant production are decreasing in the speed of learning. Copyright Springer Science+Business Media, LLC 2007

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Bibliographic Info

Article provided by Springer in its journal Journal of Industry, Competition and Trade.

Volume (Year): 7 (2007)
Issue (Month): 2 (June)
Pages: 73-93

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Handle: RePEc:kap:jincot:v:7:y:2007:i:2:p:73-93

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Web page: http://springerlink.metapress.com/link.asp?id=105724

Related research

Keywords: learning-by-doing; regulation; Markov-perfect equilibrium; linear-quadratic games; L50; L13; C73;

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  1. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
  2. Leahy, Dermot & Neary, J Peter, 1999. "Learning by Doing, Precommitment and Infant-Industry Promotion," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 447-74, April.
  3. Miravete, E.J., 1997. "Time-Consistent Protection With Learning by Doing," UFAE and IAE Working Papers 395.97, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. D Leahy & J.P. Neary, 1995. "Learning by Doing," CEP Discussion Papers dp0251, Centre for Economic Performance, LSE.
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