Private Information and Optimal Infant Industry Protection

RePEc Short ID: pra33
ORCID iD: 0000-0001-6991-4677

Ravikumar, B.; Riezman, Raymond; Zhang, Yuzhe

doi:10.20955/wp.2022.013

Working Paper Revision

Private Information and Optimal Infant Industry Protection

Abstract: We study infant industry protection using a dynamic model in which the industry's cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. Using a mechanism-design approach, we solve for the optimal protection policy that induces the industry to reveal its true cost. We show that (i) optimal protection, measured by infant industry output, declines over time and is less than that under public information and (ii) eventual viability of the infant industry is not necessary for optimal protection under private information.

JEL Classification: F10; F13; O25; D82;

https://doi.org/10.20955/wp.2022.013