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Industrial Policy in an Imperfect World

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Author Info
Hodler, Roland

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Abstract

Theoretical analyses of industrial policy normally restrict the range of possible outcomes by abstracting from either market or government failures. This paper thus studies industrial policy and its effectiveness in a model that includes both market and government imperfections. We introduce a public agency responsible for industrial policy into the model of Hausmann and Rodrik (2003), and assume that this agency has limited information and is partly politically motivated. We further extend the model to allow the public agency to communicate with en- trepreneurs and the entrepreneurs to engage in rent seeking. We find that industrial policies are ineffective if the public agency is poorly informed, but that they are not necessarily ineffective if the public agency is highly politically motivated. Given a highly politically mo- tivated public agency, industrial policies are effective if and only if the institutional setting ensures that such policies are modest e.g. by re- stricting the public 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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Publisher Info
Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Berlin 2006 with number 13.

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Date of creation: 2006
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Handle: RePEc:zbw:gdec06:4736

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Web page: http://www.wiwi.uni-hannover.de/gif/ael/

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Related research
Keywords: Industrial Policy; Market and Government Failures; Political Economy;

Other versions of this item:

Find related papers by JEL classification:
O20 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - General
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy
L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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    Other versions:
  2. Rodrik, Rani, 1995. "Trade and industrial policy reform," Handbook of Development Economics, in: Hollis Chenery† & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 45, pages 2925-2982 Elsevier. [Downloadable!] (restricted)
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    Other versions:
  4. David Roodman, 2004. "The Anarchy of Numbers: Aid, Development, and Cross-country Empirics," Development and Comp Systems 0412003, EconWPA. [Downloadable!]
    Other versions:
  5. Alberto Alesina & Arnaud Devleeschauwer & William Easterly & Sergio Kurlat & Romain Wacziarg, 2002. "Fractionalization," Harvard Institute of Economic Research Working Papers 1959, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
    • Wacziarg, Romain & Alesina, Alberto & Devleeschauwer, Arnaud & Easterly, William & Kurlat, Sergio, 2002. "Fractionalization," Research Papers 1744, Stanford University, Graduate School of Business. [Downloadable!]
    • Alberto Alesina & Arnaud Devleeschauwer & William Easterly & Sergio Kurlat & Romain Wacziarg, 2003. "Fractionalization," NBER Working Papers 9411, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Rodrik, Dani, 1996. "Coordination failures and government policy: A model with applications to East Asia and Eastern Europe," Journal of International Economics, Elsevier, vol. 40(1-2), pages 1-22, February. [Downloadable!] (restricted)
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    Other versions:
  13. Balassa, Bela, 1988. "The Lessons of East Asian Development: An Overview," Economic Development and Cultural Change, University of Chicago Press, vol. 36(3), pages S273-90, Supplemen.
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  17. Dani Rodrik, 1993. "Taking Trade Policy Seriously: Export Subsidization as a Case Study in Policy Effectiveness," NBER Working Papers 4567, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April. [Downloadable!] (restricted)
  19. Laffont, Jean-Jacques & Tirole, Jean, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1089-127, November. [Downloadable!] (restricted)
    Other versions:
  20. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June. [Downloadable!] (restricted)
  21. Gradstein, Mark, 1993. "Rent Seeking and the Provision of Public Goods," Economic Journal, Royal Economic Society, vol. 103(420), pages 1236-43, September. [Downloadable!] (restricted)
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