Warranted Skepticism: A Dynamic Model of Infant Industry Protection

Abstract

The neo-classical model of infant industry protection is limited in that agents have static expectations. This paper incorporates a fundamental behavioral assumption, that agents base their decisions on future expectations. An analysis of the global perfect foresight dynamics exposes the rich relationship between protection and outcome, and new policy implications. If an industry is to be protected until its good is competitive in the world market, its success is as likely as its failure, explaining the unreliability of protection programs in practice. The industry's decline after an initial take-off can also be an equilibrium. For the industry's growth to be an equilibrium, protection can be removed before the industry achieves international competitiveness. For the industry's growth to be the unique equilibrium, protection has to continue even after international competitiveness.