Marshallian Externality, Industrial Upgrading, and Industrial Policies
A growth model with multiple industries is developed to study how industries evolve as capital accumulates endogenously when each industry exhibits Marshallian externality (increasing returns to scale) and to explain why industrial policies sometim...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110913162136 http://hdl.handle.net/10986/3560 |
| Summary: | A growth model with multiple industries
is developed to study how industries evolve as capital
accumulates endogenously when each industry exhibits
Marshallian externality (increasing returns to scale) and to
explain why industrial policies sometimes succeed but
sometimes fail. The authors show that, in the long run, the
laissez-faire market equilibrium is Pareto optimal when the
time discount rate is sufficiently small or sufficiently
large. When the time discount rate is moderate, there exist
multiple dynamic market equilibria with diverse patterns of
industrial development. To achieve Pareto efficiency, it
would require the government to identify the industry target
consistent with the comparative advantage and to coordinate
in a timely manner, possibly for multiple times. However,
industrial policies may make people worse off than in the
market equilibrium if the government picks an industry that
deviates from the comparative advantage of the economy. |
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