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Warranted Skepticism: A Dynamic Model of Infant Industry Protection

  • Mitsuhiro Kaneda

    (Georgetown University)

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    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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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1668.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1668
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    1. Helpman, Elhanan, 1984. "Increasing returns, imperfect markets, and trade theory," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 7, pages 325-365 Elsevier.
    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.
    3. Harrison, Ann E, 1994. "An Empirical Test of the Infant Industry Argument: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1090-95, September.
    4. Matsuyama, Kiminori, 1992. "The market size, entrepreneurship, and the big push," Journal of the Japanese and International Economies, Elsevier, vol. 6(4), pages 347-364, December.
    5. Krueger, Anne O., 1984. "Trade policies in developing countries," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 11, pages 519-569 Elsevier.
    6. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
    7. 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.
    8. Ethier, Wilfred J, 1982. "Decreasing Costs in International Trade and Frank Graham's Argument for Protection," Econometrica, Econometric Society, vol. 50(5), pages 1243-68, September.
    9. Panagariya, Arvind, 1986. "Increasing returns, dynamic stability, and international trade," Journal of International Economics, Elsevier, vol. 20(1-2), pages 43-63, February.
    10. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Tornell, Aaron, 1991. "Time Inconsistency of Protectionist Programs," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 963-74, August.
    12. Kaneda Mitsuhiro, 1995. "Industrialization under Perfect Foresight: A World Economy with a Continuum of Countries," Journal of Economic Theory, Elsevier, vol. 66(2), pages 437-462, August.
    13. Krueger, Anne O & Tuncer, Baran, 1982. "An Empirical Test of the Infant Industry Argument," American Economic Review, American Economic Association, vol. 72(5), pages 1142-52, December.
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