When and how should infant industries be protected

By Marc J. Melitz. 2005

243 citations recorded by the source corpus.

This paper develops and analyzes a welfare maximizing model of infant industry protection. The domestic infant industry is competitive and experiences dynamic learning effects that are external to firms. The competitive foreign industry is mature and produces a good that is an imperfect substitute for the domestic good. A government planner can protect the infant industry using domestic production subsidies, tariffs, or quotas in order to maximize domestic welfare over time. As protection is not always optimal (although the domestic industry experiences a learning externality), the paper shows how the decision to protect the industry should depend on the industry's learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods. Assuming some reasonable restrictions on the flexibility over time of the policy instruments, the paper subsequently compares the effectiveness of the different instruments. Given such restrictions, the paper shows that quotas induce higher welfare levels than tariffs. In some cases, the dominance of the quota is so pronounced that it compensates for any amount of government revenue loss related to the administration of the quota (including the case of a voluntary export restraint, where no revenue is collected). In similar cases, the quota may even be preferred to a domestic production subsidy.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a3e7f00afbed5432ea24e5dd8aea8c8a6b8adbfd

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In Economics and Econometrics

Citations in the corpus

Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade (2014, unknown): “See Melitz (2005) for a discussion.”
Optimal Development Policies With Financial Frictions (2014, unknown): “We consider a onesector small open economy populated by two types of agents: workers and entrepreneurs.”
Trade, Foreign Investment, and Industrial Policy for Developing Countries* (2009, methodology): “Bardhan (1970) and Melitz (2005) explore the optimal way in which protection should be granted.”
Undervaluation through foreign reserve accumulation: Static losses, dynamic gains (2010, unknown): “9The Mill-Bastable test essentially states that the discounted stream of productivity gains generated through learning should exceed the discounted cost of the government intervention required to achive the learning; see e.g. Melitz (2005) for some specific applications.”