Infant Firm Subsidization in Industries with Dynamic Structure
AbstractThis 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 InfoArticle provided by Springer in its journal Journal of Industry, Competition and Trade.
Volume (Year): 7 (2007)
Issue (Month): 2 (June)
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Web page: http://springerlink.metapress.com/link.asp?id=105724
learning-by-doing; regulation; Markov-perfect equilibrium; linear-quadratic games; L50; L13; C73;
Find related papers by JEL classification:
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"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).
- 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.
- Jovanovic, B. & Nyarko, Y., 1996.
"Learning by Doing and the Choice of Technology,"
96-25, C.V. Starr Center for Applied Economics, New York University.
- D Leahy & J.P. Neary, 1995. "Learning by Doing," CEP Discussion Papers dp0251, Centre for Economic Performance, LSE.
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