Industrial Policies vs Public Goods under Asymmetric Information
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-speci...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/343061493917982244/Industrial-policies-vs-public-goods-under-asymmetric-information http://hdl.handle.net/10986/26732 |
| Summary: | 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. |
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