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  • Istituto di Economia
  • Seminario

The long-term effects of industrial policy

Data 29.03.2022 orario
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Italia

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The Institute of Economics will hold a webinar meeting as part of its Seminar Series on Tuesday, March 29, 2022: Jaedo Choi from the University of Michigan will present the paper "The long-term effects of industrial policy".

Abstract:

This paper provides causal evidence of the impact of industrial policy on firms' long-term performance and quantifies industrial policy's long-term welfare effects. Using a natural experiment and unique historical data during the Heavy and Chemical Industry (HCI) Drive in South Korea, the authors find large and persistent effects of firm-level subsidies on firm size. Subsidized firms are larger than those never subsidized even 30 years after subsidies ended. Motivated by this empirical finding, they build a quantitative heterogeneous firm model that rationalizes these persistent effects through a combination of learning-by-doing (LBD) and financial frictions that hinder firms from internalizing LBD. The model is calibrated to firm-level micro data, and its key parameters are disciplined with the econometric estimates. Counterfactual analysis implies that the industrial policy generated larger benefits than costs. If the industrial policy had not been implemented, South Korea's welfare would have been 22-31% lower, depending on how long-lived are the productivity benefits of LBD. Between one-half and two-thirds of the total welfare difference comes from the long-term effects of the policy.

The paper is available here.

The seminar will be held online; to participate please use the following link.