Industrial Policies vs Public Goods Under Asymmetric Information

14 Pages Posted: 5 May 2017

See all articles by Constantino Hevia

Constantino Hevia

Universidad Torcuato Di Tella - Departamento de Economia

Norman Loayza

World Bank - Research Department

Claudia Maria Meza Cuadra

World Bank

Date Written: May 4, 2017

Abstract

This paper presents an analytical framework that captures the informational problems and trade-offs that policy makers face when choosing between public goods (for example, infrastructure) and industrial policies (for example, firm- or sector-specific subsidies). After a discussion of the literature, the paper sets up the model economy, consisting of a government and a set of heterogeneous firms. It then presents the first-best allocation (under full information) of government resources among firms. Next, uncertainty is introduced by restricting information on firm productivity to be private to the firm. The paper develops an optimal contract (which replicates the first best), consisting of a tax-based mechanism that induces firms to reveal their true productivity. As this contract requires high government capacity, other, simpler policies are considered. The paper concludes that providing public goods is likely to dominate industrial policies under most scenarios, especially when government capacity is low.

Keywords: Tax Law, Tax Administration, Macro-Fiscal Policy, Public Finance Decentralization and Poverty Reduction, Public Sector Economics, Marketing, Economic Adjustment and Lending, Private Sector Economics, Tax Policy, Taxation & Subsidies, Private Sector Development Law

Suggested Citation

Hevia, Constantino and Loayza, Norman and Meza Cuadra, Claudia Maria, Industrial Policies vs Public Goods Under Asymmetric Information (May 4, 2017). World Bank Policy Research Working Paper No. 8052. Available at SSRN: https://ssrn.com/abstract=2963438

Constantino Hevia (Contact Author)

Universidad Torcuato Di Tella - Departamento de Economia ( email )

Minones 2177
1428 Buenos Aires
Argentina

Norman Loayza

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Claudia Maria Meza Cuadra

World Bank

1818 H Street, NW
Washington, DC 20433
United States

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