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Warranted Skepticism: A Dynamic Model of Infant Industry Protection

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  • Mitsuhiro Kaneda

    (Georgetown University)

Abstract

The neo-classical model of infant industry protection is limited in that agents have static expectations. This paper incorporates a fundamental behavioral assumption, that agents base their decisions on future expectations. An analysis of the global perfect foresight dynamics exposes the rich relationship between protection and outcome, and new policy implications. If an industry is to be protected until its good is competitive in the world market, its success is as likely as its failure, explaining the unreliability of protection programs in practice. The industry's decline after an initial take-off can also be an equilibrium. For the industry's growth to be an equilibrium, protection can be removed before the industry achieves international competitiveness. For the industry's growth to be the unique equilibrium, protection has to continue even after international competitiveness.

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  • Mitsuhiro Kaneda, 2000. "Warranted Skepticism: A Dynamic Model of Infant Industry Protection," Econometric Society World Congress 2000 Contributed Papers 1668, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1668
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    9. 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.
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    12. Bell, Martin & Ross-Larson, Bruce & Westphal, Larry E., 1984. "Assessing the performance of infant industries," Journal of Development Economics, Elsevier, vol. 16(1-2), pages 101-128.
    13. Aaron Tornell, 1991. "Time Inconsistency of Protectionist Programs," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 963-974.
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