Industrial Policies in Production Networks*

By Ernest Liu. Quarterly Journal of Economics, 2019

188 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b52e0eef1109a591e11fc9ed54d546328d0a7ed1

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Citations in the corpus

Productivity and Misallocation in General Equilibrium* (2017, unknown): “Finally, Liu (2019) considers an input-output economy with one factor, constant returns to scale, and some pre-existing non-tax wedge distortions.”
Misallocation in the Market for Inputs: Enforcement and the Organization of Production* (2018, unknown): “…intermediate inputs, e.g., Jones (2013), Bartelme and Gorodnichenko (2015), Boehm (2018), Fadinger, Ghiglino and Teteryatnikova (2016), Bigio and La’O (2016), Caprettini and Ciccone (2015), Liu (2019), Caliendo, Parro and Tsyvinski (2017), Osotimehin and Popov (2020), and Baqaee and Farhi (2020).”
Sectoral Effects of Social Distancing (2020, background): “Liu (2019) describes how a network model with distortions can be used in order to assess the effect of industrial policies, and shows that industrial policies that disproportionately target upstream sectors can be welfare-improving.”
Supply Chain Disruptions: Evidence from the Great East Japan Earthquake* (2016, background): “…of aggregate fluctuations, including early contributions by Jovanovic (1987) and Durlauf (1993); papers such as Carvalho (2010), Jones (2013), Liu (2019), Bigio and La’O (2020), Baqaee and Farhi (2020), and Grassi (2017) studying the role of linkages in propagating shocks and distortions;…”