Technological Linkages, Market Structure, and Optimum Production Policies

Douglas Holtz-Eakin and Mary Lovely

No 4779, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F12 H21 (search for similar items in EconPapers)
Date: 1994-06
Note: PE
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Citations: View citations in EconPapers (1)

Published as Journal of Public Economics, vol. 61, 1996, pp. 73-86

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