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Industrial Policy in an Imperfect World

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  • Hodler, Roland

Abstract

Theoretical analyses of industrial policy normally restrict the range of possible outcomes by abstracting from either market or government failures. This paper thus studies industrial policy and its effectiveness in a model that includes both market and government imperfections. We introduce a public agency responsible for industrial policy into the model of Hausmann and Rodrik (2003), and assume that this agency has limited information and is partly politically motivated. We further extend the model to allow the public agency to communicate with en- trepreneurs and the entrepreneurs to engage in rent seeking. We find that industrial policies are ineffective if the public agency is poorly informed, but that they are not necessarily ineffective if the public agency is highly politically motivated. Given a highly politically mo- tivated public agency, industrial policies are effective if and only if the institutional setting ensures that such policies are modest e.g. by re- stricting the public agency?s budget. Moreover, our model helps us to understand why the same industrial policies that have failed elsewhere have been relatively successful in South Korea and Taiwan.

Suggested Citation

  • Hodler, Roland, 2006. "Industrial Policy in an Imperfect World," Proceedings of the German Development Economics Conference, Berlin 2006 13, Verein für Socialpolitik, Research Committee Development Economics.
  • Handle: RePEc:zbw:gdec06:4736
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    Cited by:

    1. Herrera-Echeverri, Hernán & Haar, Jerry & Estévez-Bretón, Juan Benavides, 2014. "Foreign direct investment, institutional quality, economic freedom and entrepreneurship in emerging markets," Journal of Business Research, Elsevier, vol. 67(9), pages 1921-1932.
    2. Felipe Starosta de Waldemar, 2010. "How costly is rent-seeking to diversification : an empirical approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00461486, HAL.
    3. Ruta Aidis & Saul Estrin & Tomasz Mickiewicz, 2012. "Size matters: entrepreneurial entry and government," Small Business Economics, Springer, vol. 39(1), pages 119-139, July.
    4. Estrin, Saul & Korosteleva, Julia & Mickiewicz, Tomasz, 2011. "Which Institutions Encourage Entrepreneurs to Create Larger Firms?," CEPR Discussion Papers 8247, C.E.P.R. Discussion Papers.
    5. Wiig, Arne & Kolstad, Ivar, 2012. "If diversification is good, why don't countries diversify more? The political economy of diversification in resource-rich countries," Energy Policy, Elsevier, vol. 40(C), pages 196-203.

    More about this item

    Keywords

    Industrial Policy; Market and Government Failures; Political Economy;

    JEL classification:

    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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