PERMANENT vs. TEMPORARY INFANT INDUSTRY ASSISTANCE

Abstract

This paper develops a two period model in which a dynamic external economy, in the form of learning-by-doing spillovers, provides the rationale for infant industry assistance are then examined by introducing owner/manager effort into the learning process. It is shown, under conditions of symmetric information, that temporary assistance is optimal. Under conditions of asymmetric information, it is shown that a form of permanent assistance is optimal if the policy maker can commit to a Period 1 per unit output subsidy and a Period 2 lump-sum subsidy contingent on Period 2 output.