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Supply chain disruption and precautionary industrial policy

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Abstract

The paper analyzes the design of industrial policies, in the form of sub- sidies to innovation activity or to local production, when domestic firms are inefficient and there is a risk of supply-chain disruption. We forst es- tablish a case for research subsidies, since private investment (to improve the inferior technology) is lower than the socially optimal one. We next show the equivalence with subsidies to (inecient) local production in case of intertemporal economies of scale. Then, within a general frame- work, we analyze profit and welfare maximizing investments and optimal subsidies in case of segmented markets and an integrated market orga- nized as a duopoly, a monopoly or a research joint-venture. We show that research joint ventures or a public research center socially outperform the other environments since they benefit from a larger integrated market and a wider circulation of the innovation while preserving a competitive mar- ket. Finally, in large markets with significant technology gaps, it may be convenient to concentrate all the research in a single lab while maintaining a competitive market.

Suggested Citation

  • Massimo Motta & Michele Polo, 2024. "Supply chain disruption and precautionary industrial policy," Economics Working Papers 1895, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1895
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    JEL classification:

    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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