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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.

Suggested Citation

  • Hodler, Roland, 2009. "Industrial policy in an imperfect world," Journal of Development Economics, Elsevier, vol. 90(1), pages 85-93, September.
  • Handle: RePEc:eee:deveco:v:90:y:2009:i:1:p:85-93
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    Cited by:

    1. Estrin, Saul & Korosteleva, Julia & Mickiewicz, Tomasz, 2011. "Which Institutions Encourage Entrepreneurs to Create Larger Firms?," CEPR Discussion Papers 8247, C.E.P.R. Discussion Papers.
    2. Wiig, Arne & Kolstad, Ivar, 2012. "If diversification is good, why don't countries diversify more? The political economy of diversification in resource-rich countries," Energy Policy, Elsevier, vol. 40(C), pages 196-203.
    3. Herrera-Echeverri, Hernán & Haar, Jerry & Estévez-Bretón, Juan Benavides, 2014. "Foreign direct investment, institutional quality, economic freedom and entrepreneurship in emerging markets," Journal of Business Research, Elsevier, vol. 67(9), pages 1921-1932.
    4. Starosta de Waldemar, Felipe, 2010. "How costly is rent-seeking to diversification: an empirical approach," Proceedings of the German Development Economics Conference, Hannover 2010 4, Verein für Socialpolitik, Research Committee Development Economics.
    5. Ruta Aidis & Saul Estrin & Tomasz Mickiewicz, 2012. "Size matters: entrepreneurial entry and government," Small Business Economics, Springer, vol. 39(1), pages 119-139, July.

    More about this item

    Keywords

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

    JEL classification:

    • O20 - Economic Development, Innovation, 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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