Industrial policies vs public goods under asymmetric information

Constantino Hevia, Norman Loayza () and Claudia Maria Meza Cuadra Balcazar
Authors registered in the RePEc Author Service: Claudia Meza-Cuadra

No 8052, Policy Research Working Paper Series from The World Bank

Abstract: This paper presents an analytical framework that captures the informational problems and trade-offs that policy makers face when choosing between public goods (for example, infrastructure) and industrial policies (for example, firm- or sector-specific subsidies). After a discussion of the literature, the paper sets up the model economy, consisting of a government and a set of heterogeneous firms. It then presents the first-best allocation (under full information) of government resources among firms. Next, uncertainty is introduced by restricting information on firm productivity to be private to the firm. The paper develops an optimal contract (which replicates the first best), consisting of a tax-based mechanism that induces firms to reveal their true productivity. As this contract requires high government capacity, other, simpler policies are considered. The paper concludes that providing public goods is likely to dominate industrial policies under most scenarios, especially when government capacity is low.

Keywords: Tax Law; Tax Administration; Macro-Fiscal Policy; Public Finance Decentralization and Poverty Reduction; Public Sector Economics; Marketing; Economic Adjustment and Lending; Private Sector Economics; Tax Policy; Taxation&Subsidies; Private Sector Development Law (search for similar items in EconPapers)
Date: 2017-05-04
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Related works:
Journal Article: Industrial Policies vs Public Goods under Asymmetric Information (2023)
Working Paper: Industrial Policies vs Public Goods under Asymmetric Information (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:8052

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