Industrial policies in production networks

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Abstract

Many developing economies adopt industrial policies favoring selected sectors. Is there an economic logic to this type of intervention? I analyze industrial policy when economic sectors form a production network via input-output linkages. Market imperfections generate distortionary effects that compound through backward demand linkages, causing upstream sectors to become the sink for imperfections and have the greatest size distortions. My key finding is that the distortion in sectoral size is a sufficient statistic for the social value of promoting that sector; thus, there is an incentive for a well-meaning government to subsidize upstream sectors. Furthermore, sectoral interventions' aggregate effects can be simply summarized, to first order, by the cross-sector covariance between my sufficient statistic and subsidy spending. My sufficient statistic predicts sectoral policies in South Korea in the 1970s and modern-day China, suggesting that sectoral interventions might have generated positive aggregate effects in these economies.

Original languageEnglish (US)
Pages (from-to)1883-1948
Number of pages66
JournalQuarterly Journal of Economics
Volume134
Issue number4
DOIs
StatePublished - Nov 1 2019

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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