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Well-Intended Policies

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Author Info

  • Francisco Buera

    (UCLA)

  • Benjamin Moll

    (Princeton University)

  • Yongseok Shin

    (Washington University)

Abstract

Market failures provide a rationale for policy intervention. But policies are often hard to alter once in place. We argue that this inertia can result in well-intended policies having sizable negative long-run effects on aggregate output and productivity. In our theory, financial frictions provide a rationale for providing subsidized credit to productive entrepreneurs to alleviate the credit constraints they face. In the short run, such targeted subsidies have the intended effect and raise aggregate output and productivity. In the long run, however, individual productivities mean-revert while individual-specific subsidies remain fixed. As a result, entry into entrepreneurship is distorted: The subsidies prop up entrepreneurs that were formerly productive but are now unproductive, while impeding the entry of newly productive individuals. Therefore aggregate output and productivity are depressed. Our theory provides an explanation for two empirical observations on developing countries: idiosyncratic distortions that disproportionately affect productive establishments, and temporary growth miracles followed by growth failures. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 16 (2013)
Issue (Month): 1 (January)
Pages: 216-230

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Handle: RePEc:red:issued:11-216

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Related research

Keywords: Industrial policy; Idiosyncratic distortions; Financial frictions;

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References

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  1. Stephen Coate & Stephen Morris, . "Policy Persistence," CARESS Working Papres 97-2, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  2. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2000. "A New Database on the Structure and Development of the Financial Sector," World Bank Economic Review, World Bank Group, vol. 14(3), pages 597-605, September.
  3. Harberger, Arnold C, 1998. "A Vision of the Growth Process," American Economic Review, American Economic Association, vol. 88(1), pages 1-32, March.
  4. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  5. Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
  6. Guner, Nezih & Ventura, Gustavo & Xu, Yi, 2007. "Macroeconomic Implications of Size-Dependent Policies," CEPR Discussion Papers 6138, C.E.P.R. Discussion Papers.
  7. Takero Doi & Takeo Hoshi, 2003. "Paying for the FILP," NBER Chapters, in: Structural Impediments to Growth in Japan, pages 37-70 National Bureau of Economic Research, Inc.
  8. Benjamin Bridgman & Shi Qi & James A. Schmitz, Jr., 2009. "The economic performance of cartels: evidence from the New Deal U.S. sugar manufacturing cartel, 1934-74," Staff Report 437, Federal Reserve Bank of Minneapolis.
  9. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
  10. Magnus Blomström & Jennifer Corbett & Fumio Hayashi & Anil Kashyap, 2003. "Structural Impediments to Growth in Japan," NBER Books, National Bureau of Economic Research, Inc, number blom03-1, May.
  11. Cole, Harold L. & Ohanian, Lee E. & Riascos, Alvaro & Schmitz, James Jr, 2005. "Latin America in the rearview mirror," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 69-107, January.
  12. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
  13. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  14. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  15. Benjamin F. Jones & Benjamin A. Olken, 2005. "The Anatomy of Start-Stop Growth," NBER Working Papers 11528, National Bureau of Economic Research, Inc.
  16. List, Friedrich, 1885. "The National System of Political Economy," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number list1885.
  17. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
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Cited by:
  1. Antonio Antunes & Tiago Cavalcanti & Anne Villamil, 2012. "The Effects of Credit Subsidies on Development," Centre for Growth and Business Cycle Research Discussion Paper Series 176, Economics, The Univeristy of Manchester.
  2. Kaiji Chen, 2013. "The Role of Allocative Efficiency in A Decade of Recovery," 2013 Meeting Papers 886, Society for Economic Dynamics.

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