Infant-Industry Protection Reconsidered: the Case of Informational Barriers to Entry

27 Pages Posted: 21 Mar 2007

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Henrik Horn

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); Bruegel

Date Written: February 1987

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.

Suggested Citation

Grossman, Gene M. and Horn, Henrik, Infant-Industry Protection Reconsidered: the Case of Informational Barriers to Entry (February 1987). NBER Working Paper No. w2159. Available at SSRN: https://ssrn.com/abstract=975460

Gene M. Grossman (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

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Henrik Horn

Research Institute of Industrial Economics (IFN) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Bruegel ( email )

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