Working Paper: NBER ID: w2159
Authors: Gene M. Grossman; Henrik Horn
Abstract: In industries with imperfect consumer information, the lack of a reputation puts latecomers at a competitive disadvantage vis-a-vis established firms. We consider whether the existence of such informational barriers to entry provides a valid reason for temporarily protecting infant producers of experience goods and services. Our model incorporates both moral hazard in an individual firm's choice of quality and adverse selection among potential entrants into the industry. We find that infant-industry protection often exacerbates the welfare loss associated with these market imperfections.
Keywords: infant industry; informational barriers; temporary protection; moral hazard; adverse selection
JEL Codes: F13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| temporary protection (H84) | lowers domestic welfare (H53) |
| temporary protection (H84) | promotes entry (F55) |
| temporary protection (H84) | does not alleviate moral hazard (G52) |
| temporary protection (H84) | exacerbates adverse selection problems (D82) |
| temporary tariff (F38) | reduces consumer surplus (D11) |
| capital investment (E22) | signals quality (L15) |
| temporary tariff (F38) | increases social cost of signaling (D79) |
| permanent protection (G52) | increases excess capacity investment (E22) |
| informational barriers (L86) | ineffectiveness of trade policies (F68) |
| policies that reward firms (H32) | do not encourage unnecessary market entry (L10) |