Industrial Clusters, Asymmetric Information and Industrial Policy

A market economy allocates too few resources to an industry with increasing returns to scale, such as an agglomerated cluster. A subsidy to the cluster is therefore welfare improving. However, often governments do not know which industries exhibit increasing returns to scale, and distinguishing true clusters from ordinary industries may thus represent an obstacle to intervention. This paper attempts to shed some light on the problem of industrial policy in the context of industrial clusters when there is asymmetric information between government and industry. The paper shows that a subsidy contingent on a certain activity level will create a separating equilibrium. The model implies that if government wishes to subsidise an alleged cluster that can overcome the co-ordination problem, the subsidy should be made contingent on a critical employment level. If there are several input factors, the subsidy cannot be linked to the employment of only one of these; instead it should be linked to the activity level in the relevant industry

  • Authors: Linda Orvedal
  • Year: 2004
  • Organisation: Norwegian School of Economics and Business Administration
  • Publisher: European Trade Study Group
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