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Infant industry policy and information revelation

Carlos Asilis and Carlos Richardson
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Carlos Richardson: University of Otago

Estudios Económicos, 1994, vol. 9, issue 2, 209-236

Abstract: We study domestic entry into an established durable good industry under imperfect information. Prior to making a costly entry decision, entrepreneurs observe their true type profitability only with some (common) noise. We consider policy when the government has finer information than firms about the common noise, allowing for two types of well meaning government with different objectives. We show that one government may signal its type with a second best policy to encourage entry. This result provides a rationale for the observed phenomena of governments choosing suboptimal infant industry interventions despite accepted economic wisdom.

Date: 1994
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Handle: RePEc:emx:esteco:v:9:y:1994:i:2:p:209-236