Working Paper: NBER ID: w31178
Authors: Shangjin Wei; Jianhuan Xu; Ge Yin; Xiaobo Zhang
Abstract: A relatively mild form of government failure - for example, bureaucrats can count but do not differentiate quality - can significantly affect the efficacy of industrial policy. We investigate this idea in the context of China's largest pro-innovation industrial policy using a structural model. We find that the return to the subsidy program is -19.7\\% (but would be 7.8\\% if the mild government failure can be removed). Furthermore, the welfare loss is exacerbated by patent trade.
Keywords: government failure; industrial policy; patent trade; China; subsidy program
JEL Codes: H21; O14; O25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mild government failure (H19) | subsidy program return (H20) |
| bureaucrats' inability to differentiate patent quality (L15) | subsidy allocation (H20) |
| increase in patent count (O34) | decline in patent quality (L15) |
| patent trade (O34) | production of low-quality patents (L15) |
| without patent trade (F19) | subsidy program leads to low-quality patents (O38) |
| mild government failure + patent trade (D45) | welfare loss (D69) |