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Private Information and Optimal Infant Industry Protection

Author

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  • B. Ravikumar
  • Raymond G. Riezman
  • Yuzhe Zhang

Abstract

We study infant industry protection using a dynamic model in which the industry’s cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. We use a mechanism-design approach to induce the industry to reveal its true cost. We show that (i) the optimal protection, measured by infant industry output, declines over time and is less than that under public information, (ii) the optimal protection policy is time consistent under public information but not under private information, (iii) the optimal protection policy can be implemented with minimal information requirements, and (iv) a government with a limited budget can use a simple approach to choose which industries to protect.

Suggested Citation

  • B. Ravikumar & Raymond G. Riezman & Yuzhe Zhang, 2022. "Private Information and Optimal Infant Industry Protection," CESifo Working Paper Series 9772, CESifo.
  • Handle: RePEc:ces:ceswps:_9772
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    References listed on IDEAS

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    More about this item

    Keywords

    protection; infant industry; private information; mechanism design; time consistency;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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