Paper #1895

Title:

Supply chain disruption and precautionary industrial policy

Authors:

Massimo Motta and Michele Polo

Date:

October 2024

Abstract:

The paper analyzes the design of industrial policies, in the form of sub- sidies to innovation activity or to local production, when domestic firms are inefficient and there is a risk of supply-chain disruption. We forst es- tablish a case for research subsidies, since private investment (to improve the inferior technology) is lower than the socially optimal one. We next show the equivalence with subsidies to (inecient) local production in case of intertemporal economies of scale. Then, within a general frame- work, we analyze profit and welfare maximizing investments and optimal subsidies in case of segmented markets and an integrated market orga- nized as a duopoly, a monopoly or a research joint-venture. We show that research joint ventures or a public research center socially outperform the other environments since they benefit from a larger integrated market and a wider circulation of the innovation while preserving a competitive mar- ket. Finally, in large markets with significant technology gaps, it may be convenient to concentrate all the research in a single lab while maintaining a competitive market.

Keywords:

Resilience, industrial policy

JEL codes:

L40, L52, O31, O32

Area of Research:

Business Economics and Industrial Organization

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