Working Paper: CEPR ID: DP13931
Authors: Arnaud Costinot; Dominick Bartelme; Dave Donaldson; Andres Rodriguez-Clare
Abstract: The textbook case for industrial policy is well understood. If some sectors are subject to external economies of scale, whereas others are not, a government should subsidize the first group of sectors at the expense of the second. The empirical relevance of this argument, however, remains unclear. In this paper we develop a strategy to estimate sector-level economies of scale and evaluate the gains from such policy interventions in an open economy. Our benchmark results point towards significant and heterogeneous economies of scale across manufacturing sectors, but only modest gains from industrial policy, below 1% of GDP on average. Though these gains can be larger in some of the alternative environments that we consider, they are always smaller than the gains from optimal trade policy.
Keywords: industrial policy; economies of scale; trade policy
JEL Codes: F10; F11; F12; F13; F14; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous increase in sector size (O41) | lower effective prices of labor services (J39) |
| lower effective prices of labor services (J39) | external economies of scale (R12) |
| negative correlation between estimated scale elasticities and trade elasticities (F14) | sectors benefiting from Pigouvian subsidies may also require export taxes (H23) |
| external economies of scale (R12) | lower private marginal costs (D40) |
| lower private marginal costs (D40) | rationale for Pigouvian subsidies (H23) |
| average elasticity of 0.13 (C29) | modest welfare gains from optimal industrial policy (O25) |
| gains from industrial policy (O25) | modest compared to trade policy (F13) |