The Textbook Case for Industrial Policy: Theory Meets Data

Bartelme, Dominick; Costinot, Arnaud ; Donaldson, Dave; Rodríguez-Clare, Andrés

Abstract

The textbook case for industrial policy is well understood. If some sectors are subject to external economies of scale, whereas others are not, a government should subsidize the first group of sectors at the expense of the second. Little is known, however, about the magnitude of the welfare gains from such policy interventions. In this paper we develop an empirical strategy that leverages commonly available trade data and existing estimates of sector-level trade elasticities to estimate sector-level economies of scale and, in turn, to quantify the gains from optimal industrial policy in a general-equilibrium environment. Our results point towards significant economies of scale across manufacturing sectors, but gains from industrial policy that are hardly transformative, even among the most open economies. for discussions, to Tishara Garg, Daniel Haanwinckel and Walker Ray for outstanding research assistance, and to many seminar and conference participants for comments. Costinot and Donaldson thank the NSF (grant 1559015) for financial support.

Citation

Bartelme, D., Costinot, A., Donaldson, D., & Rodríguez-Clare, A. (2025). The Textbook Case for Industrial Policy: Theory Meets Data. Journal of Political Economy, https://doi.org/10.1086/734129

• Journal Article Type: Article
• Acceptance Date: Jul 8, 2024
• Online Publication Date: Mar 13, 2025
• Publication Date: Mar 13, 2025
• Deposit Date: Oct 10, 2024
• Publicly Available Date: Mar 14, 2026
• Journal: Journal of Political Economy
• Print ISSN: 0022-3808
• Electronic ISSN: 1537-534X
• Publisher: University of Chicago Press
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1086/734129
• Public URL: https://nottingham-repository.worktribe.com/output/40562264
• Publisher URL: https://www.journals.uchicago.edu/doi/10.1086/734129