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Adverse Selection In Credit Markets And Infant Industry Protection

Author

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  • FLAM, H.
  • STAIGER, R.W.

Abstract

This paper considers the role for infant industry protection when credit markets suffer from adverse risk selection. We show that asymmetric information about firm-specific risk leads to under-funding of the infant industry in a competitive credit market. A small amount of infant industry protection is shown to be welfare improving, and the optimal infant industry tariff is derived. Finally, an alternative government policy of production subsidies is considered under the assumption that the government shares private knowledge with infant industry firms. We argue that a tariff may dominate production subsidies as an entry promoting devise in this context.
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Suggested Citation

  • Flam, H. & Staiger, R.W., 1989. "Adverse Selection In Credit Markets And Infant Industry Protection," Papers 432, Stockholm - International Economic Studies.
    • Handle: RePEc:fth:stocin:432
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    Cited by:

    1. Asilis, Carlos & Richardson, Carlos, 1994. "Infant industry policy and information revelation," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 9(2), pages 209-236.
    2. Baldwin, Robert E, 1992. "Are Economists' Traditional Trade Policy Views Still Valid?," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 804-829, June.
    3. Roland Hodler, 2008. "Specialization and Welfare in the Presence of Imperfectly Integrated Capital Markets and Learning-by-doing," Open Economies Review, Springer, vol. 19(3), pages 391-402, July.
    4. Bin Xu, 2003. "Trade and financial liberalization with asymmetric information in bank financing," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(2), pages 57-69.

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