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Technological Linkages, Market Structure, and Optimum Production Policies

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  • Douglas Holtz-Eakin
  • Mary E. Lovely

Abstract

There has been an increased interest in the efficacy of industrial policy. We show that policy design for vertically-related industries hinges on the nature of market interactions as well as technological linkages. Using a model in which final-good producers realize productivity gains from increasing domestic specialization of intermediate processes, we find no theoretical basis for presuming that an imperfectly competitive intermediates sector restricts output below the optimal level or that the market produces too many varieties. The direction of distortion depends on the relationship between the extent of the external economy and the market power of individual intermediates producers. Optimal corrective policies require two instruments: an output subsidy and a lump-sum tax or subsidy. If only one instrument is available, it may be optimal to tax instead of subsidize the externality-generating activity.

Suggested Citation

  • Douglas Holtz-Eakin & Mary E. Lovely, 1994. "Technological Linkages, Market Structure, and Optimum Production Policies," NBER Working Papers 4779, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4779
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    References listed on IDEAS

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    Cited by:

    1. Holtz-Eakin, Douglas & Lovely, Mary E., 1996. "Scale economies, returns to variety, and the productivity of public infrastructure," Regional Science and Urban Economics, Elsevier, vol. 26(2), pages 105-123, April.

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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