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Industrial Policies vs Public Goods under Asymmetric Information

Author

Listed:
  • Constantino Hevia

    (Universidad Torcuato di Tella)

  • Norman Loayza

    (The World Bank)

  • Claudia Meza-Cuadra

    (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 (e.g., infrastructure) and industrial policies (e.g., firm or sector-specific subsidies). After a discussion of the literature, we set up the model economy, consisting of a government and a set of heterogeneous firms. We first present the first-best allocation (under full information) of government resources among firms. We then introduce uncertainty by restricting information regarding firm productivity to be private to the firm. We develop an optimal contract (which replicates the first best) consisting of a tax-based mechanism that induces firms to reveal their true productivity. As this requires high government capacity, we consider other simpler policies. We conclude that providing public goods is likely to dominate industrial policies under most scenarios, especially when government capacity is low.

Suggested Citation

  • Constantino Hevia & Norman Loayza & Claudia Meza-Cuadra, 2017. "Industrial Policies vs Public Goods under Asymmetric Information," Working Papers 93, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:2017-093
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    References listed on IDEAS

    as
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    2. Joseph E. Stiglitz & Justin Yifu Lin (ed.), 2013. "The Industrial Policy Revolution I," International Economic Association Series, Palgrave Macmillan, number 978-1-137-33517-3.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Industrial Policy; Public Goods; Uncertainty; Private Information; Firm Subsidies and Taxes;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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