Marshallian Externality, Industrial Upgrading, and Industrial Policies

38 Pages Posted: 20 Apr 2016

See all articles by Jiandong Ju

Jiandong Ju

University of Oklahoma - Department of Economics; Tsinghua University - PBC School of Finance

Justin Y. Lin

Peking University - China Center for Economic Research

Yong Wang

Hong Kong University of Science & Technology (HKUST)

Date Written: September 1, 2011

Abstract

A growth model with multiple industries is developed to study how industries evolve as capital accumulates endogenously when each industry exhibits Marshallian externality (increasing returns to scale) and to explain why industrial policies sometimes succeed but sometimes fail. The authors show that, in the long run, the laissez-faire market equilibrium is Pareto optimal when the time discount rate is sufficiently small or sufficiently large. When the time discount rate is moderate, there exist multiple dynamic market equilibria with diverse patterns of industrial development. To achieve Pareto efficiency, it would require the government to identify the industry target consistent with the comparative advantage and to coordinate in a timely manner, possibly for multiple times. However, industrial policies may make people worse off than in the market equilibrium if the government picks an industry that deviates from the comparative advantage of the economy.

Keywords: Water and Industry, Economic Theory & Research, Industrial Management, Industrial Economics, Common Property Resource Development

Suggested Citation

Ju, Jiandong and Lin, Justin Yifu and Wang, Yong, Marshallian Externality, Industrial Upgrading, and Industrial Policies (September 1, 2011). World Bank Policy Research Working Paper No. 5796, Available at SSRN: https://ssrn.com/abstract=1927148

Jiandong Ju (Contact Author)

University of Oklahoma - Department of Economics ( email )

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Tsinghua University - PBC School of Finance

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Beijing 100083
China

Justin Yifu Lin

Peking University - China Center for Economic Research ( email )

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Haidian District
Beijing, Beijing 100871
China

Yong Wang

Hong Kong University of Science & Technology (HKUST) ( email )

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Kowloon, 999999
Hong Kong

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