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PreprintCited by 114Global trade and economicsEconomic Theory and PolicyInnovation Policy and R&D

The Textbook Case for Industrial Policy: Theory Meets Data

Open access
Bartelme, Dominick, Costinot, Arnaud, Donaldson, Dave, Rodríguez-Clare, Andrés·2019·NBER Working Paper
DOI 10.3386/w26193
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Abstract

The authors estimate sector-level economies of scale and conclude that gains from optimal industrial policy are on average below 1% of GDP.

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Registry

Crossref · 10.3386/w26193

Cites

51 of 51 references verified0 citation errors · 0 not checkable

Statistics

Nothing to recompute.

Claims the paper makes

5 of 28 cited sources checked · 3 supported · 0 flagged · accuracy not yet measured

  • Findingcitation

    Using Caliendo and Parro (2015) trade elasticity estimates leads to significantly larger gains from industrial policy, equal to 4.81% on average.

    “Using these parameter estimates leads, in turn, to significantly larger gains from industrial policy, equal to 4.81% on average.”
    Quote in the paperSubstantial claim1 of 1 sources checked
    • cites Caliendo and Parro (2015) source

      Section 4 and the trade-elasticity estimation passage show that Caliendo and Parro estimate sectoral trade elasticities. The paper's welfare results concern tariff reductions, not gains from industrial policy; our copy does not support the claimed 4.81% average or the assertion that those estimates produce it. (LLM, conf=0.85)

      Experimental — accuracy not yet measured
  • Findingown data

    Estimated gains from industrial policy remain fairly similar for three out of four studies, ranging from 0.68% to 1.84% on average.

    “Although there is a wide range of trade elasticity estimates across these four studies (as seen in Table B.3), estimated gains from industrial policy remain fairly similar for three out of four of these studies, ranging from 0.68% to 1.84% on average.”
    Quote in the paperSubstantial claim1 of 3 sources checked
    • cites Shapiro, 2016 source
    • cites Bagwell et al., 2018 source
    • cites Caliendo and Parro, 2015 source

      The paper’s section “A New Method to Estimate Trade Elasticities” reports trade-elasticity estimates, but the passages found do not address gains from industrial policy. I searched for industrial policy, the 0.68%–1.84% range, and the comparison across four studies; none appears in our copy. (LLM, conf=0.77)

      Experimental — accuracy not yet measured
  • Findingown data

    Baseline estimates obtained from pooling across multiple cross-sections are very similar to estimates obtained from each cross-section separately.

    “And finally, while our baseline estimates are obtained from pooling across multiple cross-sections, we obtain very similar estimates from each cross-section separately.”
    Quote in the paperNot a substantial claim
  • Findingown data

    Average gains from optimal trade policy in the same environment are equal to 0.95% of GDP.

    “To put this number in perspective, the average gains from optimal trade policy that we estimate in the same environment are equal to 0.95% of GDP.”
    Quote in the paperNot a substantial claim
  • Findingown data

    There is substantial heterogeneity, with sector-level estimates ranging from 0.07 to 0.25.

    “There is also substantial heterogeneity, with sector-level estimates ranging from 0.07 to 0.25.”
    Quote in the paperNot a substantial claim
  • May combine two claims. 51
  • Classified as probably not a substantial claim. 24
  • The quote only partly states this claim. 2

  • May combine two claims.

    Interpretationown data

    The estimated scale elasticities are below the inverse of the trade elasticity in all sectors, implying that they are weaker than those implicitly assumed in trade models with monopolistic competition à la Krugman (1980) or Melitz (2003).

    “Interestingly, the previous numbers are below the inverse of the trade elasticity in all sectors, implying that our estimated scale elasticities are weaker than those implicitly assumed in trade models with monopolistic competition à la Krugman (1980) or Melitz (2003).”
    Quote in the paperSubstantial claim1 of 2 sources checked
    • cites Krugman (1980)

      Couldn’t be matched to a paper in Crossref, so it can’t be checked.

    • cites Melitz (2003) source

  • May combine two claims.

    Findingown data

    Truncating θ_k in Caliendo and Parro (2015) to values between 1.45 and 16.52 results in more modest gains from industrial policy, equal to 2.03% on average, closer to those obtained using the other three studies.

    “This results in more modest gains from industrial policy, equal to 2.03% on average, closer to those obtained using the other three studies.”
    Quote in the paperNot a substantial claim1 of 1 sources checked
    • cites Caliendo and Parro (2015) source

  • Classified as probably not a substantial claim.

    Premisecitation

    For the baseline analysis, trade elasticities θ_k in manufacturing sectors are taken as the median estimate within each sector from Bagwell, Staiger and Yurukoglu (2018), Caliendo and Parro (2015), Giri, Yi and Yilmazkuday (2018), and Shapiro (2016).

    “For our baseline analysis, we take the median estimate, within each sector, from the following recent studies: Bagwell, Staiger and Yurukoglu (2018), Caliendo and Parro (2015), Giri, Yi and Yilmazkuday (2018), and Shapiro (2016).”
    Quote in the paperSubstantial claim1 of 3 sources checked
    • cites Bagwell, Staiger and Yurukoglu (2018) source
    • cites Caliendo and Parro (2015) source
    • cites Giri, Yi and Yilmazkuday (2018)

      Couldn’t be matched to a paper in Crossref, so it can’t be checked.

  • May combine two claims.

    Findingown data

    Drawing on a dataset comprising 61 of the world's largest countries from 1995-2010, results point to statistically significant scale elasticities in every 2-digit manufacturing sector, with an average of 0.13.

    “Drawing on a dataset comprising 61 of the world's largest countries from 1995-2010, our results point to statistically significant scale elasticities in every 2-digit manufacturing sector, with an average of 0.13.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingreasoning

    In every sector, the demand-based IV estimate is lower than its corresponding OLS estimate, consistent with expected simultaneity bias in an open economy under elastic demand.

    “First, consistent with expected simultaneity bias in an open economy under elastic demand, in which sector size responds positively to productivity, in every sector we find that our demand-based IV estimate is lower than its corresponding OLS estimate.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingown data

    Gains from industrial policy range from 0.40% of GDP for the United States to 1.36% for Luxembourg, with larger gains for more open economies.

    “They range from 0.40% of GDP for the United States to 1.36% for Luxembourg, with larger gains for more open economies.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Extensions allowing for multiple factors of production and input-output linkages across sectors predict significantly larger gains from policy interventions, but all point towards gains from industrial policy that are modest relative to the gains from trade policy.

    “Though some of these extensions predict significantly larger gains from policy interventions, they all point towards gains from industrial policy that are modest relative to the gains from trade policy.”
    Quote in the paperSubstantial claim

  • The quote only partly states this claim.

    Findingown data

    On average, gains from optimal industrial policy are equal to 0.69% of GDP.

    “On average, gains from optimal industrial policy are equal to 0.69%.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingreasoning

    Pure Pigouvian taxes may backfire, with Ireland experiencing a welfare loss of 1.49% when Pigouvian taxes are not accompanied by optimal export taxes.

    “Consistent with the importance of terms-of-trade considerations, we also find that pure Pigouvian taxes may backfire, with Ireland, for instance, experiencing a welfare loss of 1.49% when Pigouvian taxes are not accompanied by optimal export taxes.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    The gains from optimal industrial policy (column 5) are smaller than those from optimal trade policy (column 4); unweighted averages are 0.69% and 0.95%, respectively.

    “The gains from optimal industrial policy (column 5) are smaller than those from optimal trade policy (column 4): focusing on the unweighted average across countries, these gains are 0.69% and 0.95%, respectively.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: The initial equilibrium observed in the data (2010) features neither taxes nor subsidies, and trade deficits D_i correspond to transfers across countries with sum zero.
    • The authors state this as an assumption: Each country is treated as a small open economy, with normalization s_j = t_j = 0.
    • The authors state this as an assumption: In the baseline calibration, scale economies in non-manufacturing sectors are set to zero (γ_NM = 0).

  • May combine two claims.

    Findingown data

    Under the second scenario (Pareto-efficient production subsidies), the GDP-weighted average gains from industrial policy are 0.22%, with gains of 1.36% in Vietnam and losses of 1.81% in Ireland.

    “The GDP-weighted average of the gains associated with this policy is 0.22%, but with (gross of transfer) gains of 1.36% in Vietnam and losses of 1.81% in Ireland.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: The initial equilibrium observed in the data (2010) features neither taxes nor subsidies, and trade deficits D_i correspond to transfers across countries with sum zero.
    • The authors state this as an assumption: Each country is treated as a small open economy, with normalization s_j = t_j = 0.
    • The authors state this as an assumption: In the baseline calibration, scale economies in non-manufacturing sectors are set to zero (γ_NM = 0).

  • May combine two claims.

    Findingown data

    All observations in Figure 4 are close to the 45-degree line, with a correlation between scale elasticities estimated using the two models equal to 0.91.

    “All observations are close to the 45-degree line (illustrated in red), with a correlation between the scale elasticities estimated using the two models equal to 0.91.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: The production functions f_k are Cobb-Douglas, with average shares consistent with the OECD's ICIO tables.

  • May combine two claims.

    Findingreasoning

    A back-of-the-envelope Harberger triangle calculation implies gains from industrial policy of 0.42%, not too far from the 0.69% estimated with general equilibrium effects and trade.

    “This implies that ∆W Y = 1 2 × (0.28) × (0.13) 2 (1/1.47)-(0.13/1.13)0.42%, not too far from the 0.69% (unweighted world average) estimated taking into account general equilibrium effects and trade.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Even under the optimistic assumption that governments maximize welfare and have full knowledge of the underlying economy, the baseline analysis points towards gains from optimal industrial policy that are, on average across all countries, equal to just 0.69% of GDP, and only amount to 1.36% for the country that gains the most.

    “Yet, even under our optimistic assumption that governments maximize welfare and have full knowledge of the underlying economy, our baseline analysis points towards gains from optimal industrial policy that are, on average across all countries, equal to just 0.69% of GDP, and only amount to 1.36% for the country that gains the most.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Governments maximize welfare and have full knowledge of the underlying economy.

  • May combine two claims. The quote only partly states this claim.

    Findingown data

    The same extreme variation in trade elasticities leads to gains from trade policy that are also much larger, equal to 19.08% on average, almost four times the gains from industrial policy.

    “The same extreme variation in trade elasticities leads to gains from trade policy that are also much larger, equal to 19.08% on average”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    As γ_NM increases from zero, the relative size of manufacturing and non-manufacturing sectors in the competitive equilibrium gets closer to its optimal value and the gains from industrial policy fall.

    “surprisingly, as we start raising γ N M from zero, the relative size of manufacturing and non-manufacturing sectors in the competitive equilibrium gets closer to its optimal value and the gains from industrial policy fall.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingreasoning

    In the model with physical capital and input-output linkages, the average gains from industrial policy are 4.14%, whereas the average gains from trade policy are 11.49%.

    “For both policies, we see that the gains in the model with physical capital and input-output linkages are much larger: the average gains from industrial policy are now equal to 4.14%, whereas the average gains from trade policy go all the way to 11.49%.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: The production functions f_k are Cobb-Douglas, with average shares consistent with the OECD's ICIO tables.

  • May combine two claims.

    Findingown data

    Countries with a higher correlation between L_k/L and γ_k have higher gains from optimal industrial policy, but this channel explains only a small fraction of variation compared to openness.

    “Our quantitative results are also consistent with this prediction: countries with a higher correlation between L k /L and γ k do indeed have higher gains from optimal industrial policy.However, compared to the variation in openness across countries, this channel only explains a small fraction of the variation in the gains from industrial policy.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Sector-level economies of scale exist and differ substantially across sectors, ranging from an elasticity of 0.07 to 0.25.

    “Empirically, we find that sector-level economies of scale indeed exist and do differ substantially across sectors, ranging from an elasticity of 0.07 to 0.25.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Under the first trade-agreement scenario (zero trade taxes), the unweighted world average gains from constrained industrial policy are 0.56%, lower than the 0.69% baseline, but gains remain smaller than optimal trade policy and higher for more open countries.

    “On average, the gains from this type of constrained industrial policy are a bit lower than those from the optimal industrial policy reported in our baseline, with the unweighted world average decreasing from 0.69% to 0.56%, but the basic message is the same: the gains are smaller than those from optimal trade policy, and are higher for more open countries.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: The initial equilibrium observed in the data (2010) features neither taxes nor subsidies, and trade deficits D_i correspond to transfers across countries with sum zero.
    • The authors state this as an assumption: Each country is treated as a small open economy, with normalization s_j = t_j = 0.
    • The authors state this as an assumption: In the baseline calibration, scale economies in non-manufacturing sectors are set to zero (γ_NM = 0).

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Findingown data

    The largest relative change in scale elasticities across sector-year estimates is for Mineral Products, from 0.13 baseline to 0.16 for 2005.

    “The largest relative change in scale elasticities, across all sector and year estimates, is that for the Mineral Products sector which changes from 0.13 in the baseline to 0.16 for 2005.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingreasoning

    The IV estimate of the elasticity of substitution between manufacturing sectors ρ is 1.47, lower than the OLS estimate of 3.35.

    “The IV estimate is ρ = 1.47, which is lower than the OLS estimate (of ρ = 3.35) as is consistent with the presence of increasing returns at the sector level.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Upper-level preferences are CES with constant elasticity of substitution ρ across all sectors (equation 8).

  • May combine two claims.

    Findingreasoning

    Ireland has gains from optimal policy almost three times higher than the United States (1.56% vs 0.55%); the gap is particularly large for trade policy (3.05% vs 0.34%) and also holds for industrial policy (1.31% vs 0.40%).

    “As an example, Ireland has gains from optimal policy that are almost three times higher than those of the United States (1.56% vs 0.55%).The gap is particularly large for the gains from trade policy (3.05% vs 0.34%), but the pattern also holds for the gains from industrial policy (1.31% vs 0.40%).”
    Quote in the paperNot a substantial claim
    • The authors state this as an assumption: The initial equilibrium observed in the data (2010) features neither taxes nor subsidies, and trade deficits D_i correspond to transfers across countries with sum zero.
    • The authors state this as an assumption: Each country is treated as a small open economy, with normalization s_j = t_j = 0.
    • The authors state this as an assumption: In the baseline calibration, scale economies in non-manufacturing sectors are set to zero (γ_NM = 0).

  • May combine two claims.

    Findingown data

    Even for ρ = 2.39, the average gains from industrial policy are only 0.93%, still below the gains from trade policy.

    “Quantitatively, however, we see that even for ρ = 2.39, the average gains from industrial policy are only 0.93%, still below the gains from trade policy.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    These modest gains from industrial policy are slightly smaller than the average gains from optimal trade policy alone, which are equal to 0.95% of GDP.

    “These modest gains from industrial policy are slightly smaller than the average gains from optimal trade policy alone, which are equal to 0.95% of GDP.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    The 2SLS estimates point to substantial economies of scale, with an average scale elasticity of 0.13 across manufacturing sectors.

    “The results point to substantial economies of scale-with an average scale elasticity of 0.13-that are statistically significantly different from zero in every sector.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Bilateral trade shares between an origin country i and a destination j in any sector k satisfy a gravity equation with trade elasticity θ_k (equation 6).
    • The authors state this as an assumption: External economies of scale in sector k are given by E_k(L)=L^γ_k, with elasticity γ_k constant within each sector.

  • May combine two claims.

    Findingown data

    The demand residual-based IV for any given sector has a strong correlation with its own sector size and a far weaker correlation with any other sector's size.

    “Specifically, TableB.4 reports, for each first-stage regression, that the demand residual-based IV for any given sector has a strong correlation with its own sector size and a far weaker correlation with any other sector's size.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingcitation

    In a small number of cases the procedure results in γkθk ≥ 1, leading to multiplicity of equilibria.

    “In a small number of cases this procedure results in γ k θ k ≥ 1, which leads to multiplicity of equilibria, as pointed out byKucheryavyy et al. (2017).”
    Quote in the paperNot a substantial claim0 of 1 sources checked
    • cites Kucheryavyy et al. (2017)

      Couldn’t be matched to a paper in Crossref, so it can’t be checked.

  • May combine two claims.

    Findingown data

    The conventional F-statistic from the 15 instruments in each first-stage equation is large, and the Sanderson-Windmeijer F-statistic is considerably larger.

    “Consequently, as seen in column (4) of Table1, the conventional F-statistic from the 15 instruments in each first-stage equation is large and the Sanderson and Windmeijer (2016) F-statistic in column (5), which assesses the extent to which each first-stage is affected by independent variation in the instruments from that in the other 14 first-stages, is considerably larger.”
    Quote in the paperSubstantial claim0 of 1 sources checked
    • cites Sanderson and Windmeijer (2016)

      Couldn’t be matched to a paper in Crossref, so it can’t be checked.

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Findingnone given

    The number of observations for columns (2) and (3) is 169,483.

    “The number of observations for columns (2) and (3) is 169,483.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Findingown data

    Using country-varying value-added and input use shares makes very little difference to the resulting estimates of γk.

    “This turns out to make very little difference to the resulting estimates of γ k .”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Findingnone given

    The number of observations is 207,542.

    “The number of obserations is 207,542.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S4 (based).

    Premisenone given

    In each destination and within each sector, trade flows from different origins reflect the optimal demand for labor services from these countries.

    “The starting point of our empirical strategy is the observation that in each destination and within each sector, trade flows from different origins reflect the optimal demand for labor services from these countries.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Premisereasoning

    Under parametric restrictions, the log of the price of labor services from a country is proportional to the log of its sector size, with a slope given by the scale elasticity; and the revealed log of the price of labor services is proportional to the log of its bilateral exports, with a slope given by the inverse of the trade elasticity.

    “Under these restrictions, the (log of the) price of labor services from a country is proportional to (the log of) its sector size, with a slope given by the scale elasticity; and the revealed (log of the) price of labor services is proportional to (the log of) its bilateral exports, with a slope given by the inverse of the trade elasticity.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Productivity is a log-linear function of sector size, so scale elasticities are constant.
    • The authors state this as an assumption: Demand for labor services from different countries takes the Constant Elasticity of Substitution (CES) form, so trade elasticities are constant.

  • Classified as probably not a substantial claim.

    Premisenone given

    The empirical relevance of the textbook case for industrial policy remains unclear.

    “The empirical relevance of this argument, however, remains unclear.”
    Quote in the paperSubstantial claim0 of 1 sources checked
    • cites Pigou (1920)

      Couldn’t be matched to a paper in Crossref, so it can’t be checked.

  • May combine two claims.

    Premisereasoning

    External economies of scale create a rationale for Pigouvian subsidies equal to the difference between private and social marginal costs, with welfare gains equal to the area of the Harberger triangle between demand and social marginal cost curves.

    “This creates a rationale for Pigouvian subsidies equal to the difference between the two, with the associated welfare gains equal to the area of the Harberger triangle located between the demand and social marginal cost curves, as illustrated in Figure 1.”
    Quote in the paperSubstantial claim

  • Classified as probably not a substantial claim.

    Study design and conductreasoning

    The identification strategy deliberately draws on cross-sectional variation alone, so as to isolate the long-run notion of scale economies that animates the textbook case for industrial policy.

    “Importantly, our identification strategy deliberately draws on cross-sectional variation alone, so as to isolate the longrun notion of scale economies that animates the textbook case for industrial policy.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    For a small open economy, the optimal policy consists of a mix of trade and industrial policy: sector-specific export taxes equal to the inverse of one plus the trade elasticity, and sector-specific production subsidies equal to the scale elasticity.

    “For such a small open economy, the optimal policy consists of a mix of trade and industrial policy: sector-specific export taxes-equal to the inverse of one plus the trade elasticity-to improve the country's terms-of-trade, as well as sector-specific production subsidies-equal to the scale elasticity-to address external economies of scale.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Country j is small in the sense that it can affect the price of its own good relative to goods from other countries, but cannot affect relative prices, sector-level employment, or sector-level expenditure in the rest of the world.

  • May combine two claims.

    Interpretationreasoning

    Setting γ_k = 0 for non-manufacturing sectors implies welfare gains from reallocating resources from non-manufacturing to manufacturing sectors with γ_k > 0, and makes overall gains from industrial policy higher than if γ_k in non-manufacturing were positive.

    “This implies that there are welfare gains from reallocating resources from non-manufacturing to manufacturing sectors which have γ k > 0, and so the overall gains from industrial policy will be higher than if we had set γ k in non-manufacturing to some positive value.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: In the baseline calibration, scale economies in non-manufacturing sectors are set to zero (γ_NM = 0).

  • Probably not a substantial claim: may not pass S3 (load-bearing), S4 (based). May combine two claims.

    Interpretationnone given

    The unit cost on the right-hand side is constant and identical to the one that one would obtain starting from the constant returns to scale good-level production function in Section 2.1.

    “The unit cost on the right-hand side is constant and identical to the one that one would obtain starting from the constant returns to scale good-level production function in Section 2.1.”
    Quote in the paperNot a substantial claim

  • Classified as probably not a substantial claim.

    Study design and conductreasoning

    The baseline analysis, focusing on the median of trade elasticities across studies, is purposefully designed to attenuate the potential effects of outliers.

    “Our baseline analysis, which focuses on the median of trade elasticities across studies, is purposefully designed to attenuate the potential effects of outliers.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    Under the small open economy normalization, optimal industrial policy is a production subsidy s_j,k = γ_k, optimal export tax is t_x = 1/(1+θ_k), and optimal import tax is zero.

    “By Proposition 1, optimal industrial and trade policy are therefore given by s j,k = γ k , for all k, (11) t x ji,k = 1 1 + θ k , for all k and i = j,(12) t m ij,k = 0, for all k and i,”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Each country is treated as a small open economy, with normalization s_j = t_j = 0.

  • May combine two claims.

    Interpretationnone given

    A higher ρ leads to larger reallocations in response to optimal industrial policy and, in turn, larger welfare gains.

    “As discussed above, we expect that a higher ρ would lead to larger reallocations in response to optimal industrial policy and, in turn, larger welfare gains.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Interpretationreasoning

    When supply curves slope downwards, positive demand shocks lead to reductions in prices; hence the OLS estimate of the impact of prices on expenditure shares is an underestimate of 1/ρ, leading to an overestimate of ρ.

    “When supply curves slope downwards, positive demand shocks lead to reductions in prices.Hence, the OLS estimate of the impact of prices on expenditure shares, which confounds a truly downward-sloping demand curve with the negative correlation between demand shocks and prices, will be an underestimate of 1ρ, leading to an overestimate of ρ.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationnone given

    The introduction of input-output linkages tends to make supply more elastic, increasing the size of Harberger triangles and the absolute levels of the gains from policy.

    “In addition, the introduction of input-output linkages tends to make supply more elastic, again increasing the size of Harberger triangles and the absolute levels of the gains from policy.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Study design and conductown data

    All estimates of γ_k remain statistically significant at the 5% level and the instruments remain strong by conventional standards, with the lowest first-stage SW F-statistic equal to 203.6.

    “All estimates of γ k remain statistically significant at the 5% level and the instruments remain strong by conventional standards (with the lowest first-stage SW F-statistic equal to 203.6).”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    The identification results in Section 3 are asymptotic and require an infinite sequence of economies to point-identify external economies of scale E_k in all sectors.

    “The identification results presented in Section 3 are asymptotic in nature.They reveal conditions under which, in theory, one could point-identify external economies of scale, E k , in all sectors with a dataset that includes an infinite sequence of economies.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    Smaller countries gain more from optimal trade policy because such policy improves terms-of-trade and small countries tend to trade more.

    “The reason why smaller countries gain more from optimal trade policy is simple: such a policy improves a country's terms-of-trade, and since small countries tend to trade more, they benefit more from that improvement.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    The functional forms in equations (6)-(9) imply that all level-shifters can change over time, but the elasticities {θ_k}, {γ_k}, and ρ cannot.

    “One feature to note about the functional forms in equations ( 6)-( 9) is that all level-shifters can change over time, but the elasticities {θ k }, {γ k }, and ρ cannot.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Bilateral trade shares between an origin country i and a destination j in any sector k satisfy a gravity equation with trade elasticity θ_k (equation 6).
    • The authors state this as an assumption: External economies of scale in sector k are given by E_k(L)=L^γ_k, with elasticity γ_k constant within each sector.
    • The authors state this as an assumption: Upper-level preferences are CES with constant elasticity of substitution ρ across all sectors (equation 8).

  • May combine two claims.

    Interpretationreasoning

    The downward OLS bias is expected in an open economy where countries specialize in sectors of comparative advantage, and is consistent with ρ > 1.

    “This downward OLS bias is to be expected in an open economy in which countries specialize in sectors where they have a comparative advantage; further, it is consistent with our finding that the elasticity of substitution between sectors, ρ, is greater than one, which magnifies the impact of productivity differences on specialization.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Interpretationreasoning

    For gains from industrial policy to be large, one would need demand to be elastic or countries to produce highly substitutable and tradable goods.

    “In addition, one would need demand to be elastic or countries to produce highly substitutable and tradable goods-such that a country can simultaneously expand scale in one sector and find useful domestic or foreign substitutes for the sector that it chooses to shrink.”
    Quote in the paperSubstantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductnone given

    The non-parametric identification of external economies of scale can proceed following the same steps as in Section 3 given knowledge of the factor demand system and the sector-level production function.

    “The non-parametric identification of external economies of scale can proceed following the same steps as in Section 3 given knowledge of the factor demand system, χ j,k , and the sector-level production function f k that maps labor, physical capital, and intermediate goods into a country-and-sector specific composite factor.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Interpretationreasoning

    Absent free entry, production functions at the good level may no longer be constant returns and economies of scale estimated at the sector level may reflect a mixture of both internal and external economies of scale.

    “Absent free entry, production functions at the good level may no longer be constant returns and economies of scale estimated at the sector level may therefore reflect a mixture of both internal and external economies of scale.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    Because the elasticities are constant over time, estimation could proceed with data from just one time period; pooling multiple cross-sections only increases statistical precision.

    “This implies that, while we use data from multiple time periods, this is not necessary for estimation; we could proceed instead with data from just one time period.Choosing the former over the latter merely allows us to take advantage of the increased statistical precision that comes from pooling the data from multiple cross-sections.”
    Quote in the paperNot a substantial claim
    • The authors state this as an assumption: Bilateral trade shares between an origin country i and a destination j in any sector k satisfy a gravity equation with trade elasticity θ_k (equation 6).
    • The authors state this as an assumption: External economies of scale in sector k are given by E_k(L)=L^γ_k, with elasticity γ_k constant within each sector.
    • The authors state this as an assumption: Upper-level preferences are CES with constant elasticity of substitution ρ across all sectors (equation 8).

  • May combine two claims.

    Interpretationown data

    While some sensitivity exercises, including the introduction of input-output linkages, open the door for significantly larger gains from industrial policy, the analysis consistently points towards gains from industrial policy that are surprisingly modest relative to the gains from trade policy.

    “While some of our sensitivity exercises, including the introduction of input-output linkages, open the door for significantly larger gains from industrial policy, our analysis consistently points towards gains from industrial policy that are surprisingly modest relative to the gains from trade policy.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    The positive reduced-form relationship between predicted demand and exports is consistent with increasing returns at the sector level and the home-market effect.

    “This is again consistent with the the existence of increasing returns at the sector level, which implies that positive shocks to domestic demand cause lower prices and, in turn, greater exports.This is a manifestation of the home-market effect.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Bilateral trade shares between an origin country i and a destination j in any sector k satisfy a gravity equation with trade elasticity θ_k (equation 6).
    • The authors state this as an assumption: External economies of scale in sector k are given by E_k(L)=L^γ_k, with elasticity γ_k constant within each sector.

  • May combine two claims.

    Interpretationown data

    In the baseline calibration, ρ is set to 1.47, implying the same elasticity of substitution between manufacturing and non-manufacturing sectors as within manufacturing.

    “In our baseline exercise, we set ρ = 1.47, in line with the 2SLS estimate for manufacturing sectors reported in column (2) of Table B.2.This implies the same elasticity of substitution between manufacturing and non-manufacturing sectors as within manufacturing sectors.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Upper-level preferences are CES with constant elasticity of substitution ρ across all sectors (equation 8).
    • The authors state this as an assumption: The elasticity of substitution between manufacturing and non-manufacturing sectors is the same as within manufacturing sectors (ρ=1.47).

  • Classified as probably not a substantial claim.

    Interpretationreasoning

    Under the small open economy assumption, all countries have the same ability to manipulate their terms-of-trade.

    “Under our small open economy assumption, this implies that all countries have the same ability to manipulate their terms-of-trade.”
    Quote in the paperSubstantial claim
    • The authors state this as an assumption: Country i0 is a small open economy and only country i0 imposes trade taxes and production subsidies.
    • The authors state this as an assumption: All countries face the same trade elasticity.

  • Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

    Interpretationreasoning

    Linear 2SLS offers the benefit of simplicity and draws on finite-sample theory that is relatively well understood relative to full-information approaches.

    “But relative to full-information approaches, which would use the full structure of the model to derive an efficient nonlinear estimator, linear 2SLS offers the benefit of simplicity and draws on finite-sample theory that is relatively well understood.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationnone given

    These numbers refer to the welfare change in the country implementing the policy in question.

    “These numbers refer to the welfare change in the country implementing the policy in question.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductnone given

    Standard errors in parentheses are clustered at the exporter-sector level.

    “Standard errors in parentheses are clustered at the exporter-sector level.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationreasoning

    The CES preferences in equation (8) imply the sector-level expenditure equation.

    “The CES preferences in equation ( 8) imply the following sector-level expenditures, ln x t j,k = (1ρ) ln P t j,k + δ t j + δ t k + ε t j,k , (B.1)”
    Quote in the paperNot a substantial claim

  • Classified as probably not a substantial claim. May combine two claims.

    Study design and conductreasoning

    Equation (B.2) recovers estimates of ln P up to a sector-year-specific and an importer-year-specific scale factor only, but this has no bearing on subsequent use because of inclusion of δ.

    “Equation (B.2) recovers estimates of ln P t j,k up to a sector-year-specific and an importer-year-specific scale factor only, but this has no bearing on our subsequent use of ln P t j,k in equation (B.1) because of the inclusion of δ t j and δ t k .”
    Quote in the paperSubstantial claim

  • Classified as probably not a substantial claim.

    Study design and conductnone given

    All regressions control for importer-sector-year fixed-effects and (asymmetric) trading pair-year effects.

    “All regressions control for importer-sector-year fixed-effects and (asymmetric) trading pair-year effects.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    As long as there is some sector in which part of domestic production is sold at home, constrained-optimal production subsidies will deviate from unconstrained and gains will be strictly lower.

    “As long as there is some sector in which part of domestic production is sold at home, however, the constrained-optimal production subsidies will deviate from those and the corresponding gains will be strictly lower than those when policy is unconstrained.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Study design and conductreasoning

    Clustering at exporter-sector level corrects for unrestricted forms of serially correlated errors over time and for purely mechanical within-group correlation in the first-stage.

    “In addition to correcting for unrestricted forms of serially correlated errors over time, this clustering procedure has the advantage of correcting for the purely mechanical within-group (that is, within-exporter-sector-year) correlation in the first-stage.”
    Quote in the paperSubstantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductnone given

    The first-stage equation involves a more aggregate level of variation than the bilateral second-stage equation.

    “One unusual feature of our 2SLS estimation system of equations is that the first-stage equation involves a more aggregate level of variation than the (bilateral) second-stage equation.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

    Interpretationreasoning

    From a global standpoint, trade policy is a beggar-thy-neighbour policy, whereas industrial policy is not.

    “Of course, from a global standpoint, trade policy is a beggar-thy-neighbour policy, as improvements in one country's terms-of-trade necessarily occur at the expense of another country, whereas industrial policy is not.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductreasoning

    They cap γk such that γkθk is never higher than 0.975 because the counterfactual equilibrium under optimal policy becomes numerically unstable as γkθk approaches one from below.

    “We therefore cap the value of γ k such that γ k θ k is never higher than 0.975 (since the solution of the counterfactual equilibrium under optimal policy becomes numerically unstable as γ k θ k approaches one from below).”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationreasoning

    Absent the small open economy assumption, larger countries would have a greater ability to manipulate their terms-of-trade.

    “More generally, absent the small open economy assumption, larger countries would have a greater ability to manipulate their terms-of-trade.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductnone given

    2SLS is a limited-information approach to consistent estimation of the scale elasticity parameters γk.

    “We note that in this model 2SLS is a limited-information approach to consistent estimation of the scale elasticity parameters γ k .”
    Quote in the paperNot a substantial claim

  • Classified as probably not a substantial claim.

    Study design and conductnone given

    The baseline analysis rules out cross-sectoral differences in factor intensity and input-output linkages.

    “This rules out cross-sectoral differences in either factor intensity or input-output linkages in our baseline analysis.”
    Quote in the paperSubstantial claim
72 of 72

  • The authors state this as an assumption.

    Productivity is a log-linear function of sector size, so scale elasticities are constant.

    “Within each sector, we assume: (i) that productivity is a log-linear function of size, so that we have constant scale elasticities”

  • The authors state this as an assumption.

    Demand for labor services from different countries takes the Constant Elasticity of Substitution (CES) form, so trade elasticities are constant.

    “and (ii) that the demand for labor services from different countries takes the Constant Elasticity of Substitution (CES) form, so that we have constant trade elasticities.”

  • The authors state this as an assumption.

    Demand residuals are uncorrelated with idiosyncratic productivity shocks.

    “Under the assumption that these demand residuals are uncorrelated with idiosyncratic productivity shocks”

  • The authors state this as an assumption.

    Subutility is homothetic, standard Inada conditions hold, and demand for goods within a sector satisfies the connected substitutes property.

    “We assume that subutility U j,k is homothetic, that standard Inada conditions hold, and that demand for goods within a sector satisfies the connected substitutes property, as defined in Arrow and Hahn (1971).”

  • The authors state this as an assumption.

    External effects occur within a given sector in a country; there are no external effects that spill over across sectors or countries.

    “To keep the focus of our analysis on the textbook case for industrial policy, we restrict external effects to occur within a given sector in a country and rule out the possibility of external effects that spill over across sectors or countries.”

  • The authors state this as an assumption.

    Production at the level of goods has constant returns to scale, but not necessarily at the level of firms.

    “The above specification assumes constant returns to scale at the level of goods ω but does not require constant returns to scale at the level of firms.”

  • The authors state this as an assumption.

    Country j is small in the sense that it can affect the price of its own good relative to goods from other countries, but cannot affect relative prices, sector-level employment, or sector-level expenditure in the rest of the world.

    “We further assume that country j is small in the sense that it can only affect the price of its own good relative to goods from other countries: relative prices, sector-level employment, and sector-level expenditure in the rest of the world are all taken as exogenously given by its government.”

  • The authors state this as an assumption.

    The nonparametric identification of external economies of scale is conducted under the assumption of perfect competition, in which prices equal unit costs.

    “The nonparametric identification of external economies of scale above is conducted under the assumption of perfect competition, in which prices are equal to unit costs.”

  • The authors state this as an assumption.

    There is free entry in the production of each good.

    “provided that there is free entry in the production of each good, as in Hopenhayn (1992) and Appendix A.1.”

  • The authors state this as an assumption.

    External economies of scale may affect both the physical productivity of firms and the quality of the goods they produce.

    “Within each sector, external economies of scale may affect both the physical productivity of firms as well as the quality of the goods that they produce.”

  • The authors state this as an assumption.

    Bilateral trade shares between an origin country i and a destination j in any sector k satisfy a gravity equation with trade elasticity θ_k (equation 6).

    “Equation ( 6) states that bilateral trade shares between an origin country i and a destination j in any sector k satisfy a gravity equation with trade elasticity θ k .”

  • The authors state this as an assumption.

    External economies of scale in sector k are given by E_k(L)=L^γ_k, with elasticity γ_k constant within each sector.

    “Equation ( 7) allows external economies of scale to vary across sectors, as is critical for industrial policy considerations, but restricts the elasticity of external economies γ k to be constant within each sector.”

  • The authors state this as an assumption.

    Upper-level preferences are CES with constant elasticity of substitution ρ across all sectors (equation 8).

    “We do so under the assumption that the elasticity of substitution across manufacturing sectors is constant as well.”

  • The authors state this as an assumption.

    The exclusion restriction for the IV strategy: after conditioning on importer-exporter-year and importer-sector-year fixed effects, predicted demand ln(D_i,k) is mean-independent of supply-side shocks ε_i,j,k.

    “The exclusion restriction being imposed is that after conditioning on importer-exporter-year and importer-sector-year fixed effects, predicted demand in country i and sector k at year t, ln( D t j,k ), is mean-independent of the supply-side shocks, { t i j ,k }.”

  • The authors state this as an assumption.

    Any discrepancy between population and labor supply in efficiency units is part of the error term in equation (10), and the exclusion restriction applies to this term as well.

    “Given this measure of sector size, any discrepancy between population and labor supply in efficiency units is therefore also implicitly part of the error term in equation ( 10).That is, if L t i = ξ t i Lt i , then the error term also includes γ k ln ξ t i , with our exclusion applying to this term as well”

  • The authors state this as an assumption.

    The initial equilibrium observed in the data (2010) features neither taxes nor subsidies, and trade deficits D_i correspond to transfers across countries with sum zero.

    “we compute counterfactual equilibria under optimal policies using exact hat algebra under the assumption that the initial equilibrium observed in the data (corresponding to 2010, the final year in our dataset) features neither taxes nor subsidies and that trade deficits D i correspond to transfers across countries, with ∑ i D i = 0.”

  • The authors state this as an assumption.

    Each country is treated as a small open economy, with normalization s_j = t_j = 0.

    “Following the theoretical analysis of Section 2.3, we treat each country as a small open economy and impose the normalization s j = t j = 0.”

  • The authors state this as an assumption.

    In the baseline calibration, scale economies in non-manufacturing sectors are set to zero (γ_NM = 0).

    “Our baseline assumption of γ N M = 0-in which economies of scale are the province of the manufacturing sectors alone-might correspond to the traditional view behind industrial policy.”

  • The authors state this as an assumption.

    The elasticity of substitution between manufacturing and non-manufacturing sectors is the same as within manufacturing sectors (ρ=1.47).

    “This implies the same elasticity of substitution between manufacturing and non-manufacturing sectors as within manufacturing sectors.”

  • The authors state this as an assumption.

    Governments maximize welfare and have full knowledge of the underlying economy.

    “even under our optimistic assumption that governments maximize welfare and have full knowledge of the underlying economy”

  • The authors state this as an assumption.

    Country i0 is a small open economy and only country i0 imposes trade taxes and production subsidies.

    “Under the assumption that country i 0 is a small open economy and that only country i 0 imposes trade taxes and production subsidies”
    “Under the assumption that country i 0 is a small open economy and that only country i 0 imposes trade taxes and production subsidies, we follow the same procedure as in Appendix A.7 and”

  • The authors state this as an assumption.

    The production functions f_k are Cobb-Douglas, with average shares consistent with the OECD's ICIO tables.

    “further assume that f k is Cobb-Douglas, with average shares consistent with the OECD's ICIO tables.”

  • The authors state this as an assumption.

    Profits are single-peaked in l.

    “We assume that they are such that profits, π ij,k (l, φ, ω) = p ij,k (ω)A ij,k E A k (L i,k )F(l, φ) -w i l, are single-peaked in l.”

  • The authors state this as an assumption.

    The composite input is produced using labor, physical capital, and intermediate goods according to a constant returns-to-scale production function f_i,k.

    “We assume that the composite input is produced using labor, l ij,k (ω), physical capital, k ij,k (ω), and intermediate goods from different sectors, {q M ij,sk (ω)} s , according to z ij,k (ω) = f i,k (l ij,k (ω), k ij,k (ω), {q M ij,sk (ω)} s ), where f i,k is a constant returns-to-scale production function.”

  • The authors state this as an assumption.

    Production functions are Cobb-Douglas.

    “Like in Appendix A.8.3, we assume that production functions are Cobb-Douglas, as described in equation (A.21).”

  • The authors state this as an assumption.

    Sector-level production functions f_k are constant across countries.

    “We maintain the assumption that sector-level production functions, f k , are constant across countries, but allow for Hicks-neutral differences across countries and sectors.”

  • The authors state this as an assumption.

    The Harberger formula assumes quasi-linear preferences and autarky.

    “The Harberger formula displayed above implicitly assumes quasi-linear preferences and autarky.”

  • The authors state this as an assumption.

    All countries face the same trade elasticity.

    “In our model, like in any standard gravity model, all countries face the same trade elasticity.”

  • The authors state this as an assumption.

    The exclusion restriction requires that countries with large populations do not have systematically greater demand, relative to smaller countries, in some sectors than others.

    “The exclusion restriction requires that countries with large populations do not have systematically greater demand, relative to smaller countries, in some sectors than others.”
29 of 29

Self-check

Percentages, sums and reported differences re-computed from the paper’s own numbers.

Each contradiction between two passages listed here was confirmed by an independent check.

  • The conclusion labels a conditional trade-policy gain as trade policy alone

    Major

    The conclusion calls 0.95% the average gain from trade policy alone. In Table 2, trade policy alone averages 0.36%; 0.95% is the gain from adding trade policy when production subsidies are already in place.

  • Germany's results differ across the two policy tables

    Major

    Table 2 reports Germany's industrial-policy-only gain as −0.13% and its gain from adding trade policy as 1.04%. Table B.8 instead reports −0.17% and 1.08%, respectively, for the same country and policies.

  • The stated marginal-cost ordering is reversed

    Minor

    The introduction says private marginal cost is below social marginal cost. Its description of a positive subsidy as MC minus SMC, together with output below the social optimum, implies the opposite ordering.

  • OLS bias is described in the wrong direction

    Minor

    The paper says every OLS estimate exceeds its 2SLS counterpart, then calls this a downward OLS bias. Relative to the preferred 2SLS estimates, the stated pattern is upward bias.

  • First-stage F-statistics differ between corresponding tables

    Minor

    Tables 1 and B.4 describe the same first-stage regressions, but give different F-statistics for the Food, Beverages and Tobacco sector: 87.20 and 394.3 in Table 1 versus 77.00 and 388.8 in Table B.4.

5 of 5

Cites

Flagged first, then by citations

6 of the 57 references couldn’t be matched to a known paper.

Research works printed but not linked: 1

  1. [28]28. Marshall, Alfred, Principles of Economics, An Introductory Volume, London: Mcmillan, eighth edition, 1920.

Cited by

Sorted by citations

Related

Authors
Bartelme, D., Costinot, A., Donaldson, D., & Rodríguez-Clare, A.
Affiliations
National Bureau of Economic Research (US)
Venue
NBER Working Paper
Publisher
National Bureau of Economic Research
Published
2019-08
DOI
10.3386/w26193
OpenAlex
W2970984959
Cited by
114
References
57
Citations by year
2026: 5 · 2025: 10 · 2024: 26 · 2023: 31 · 2022: 16 · 2021: 15 · 2020: 7 · 2019: 2 · 2017: 2
Type
report
Language
en
Open access
Locations
National Bureau of Economic Research (publishedVersion)
Funders
National Science Foundation (1559015)
Topics
  • Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Global trade and economics
  • Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Economic Theory and Policy
  • Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Innovation Policy and R&D
Keywords
industrial policy, economies of scale, manufacturing industry, open economy, trade policy, optimal trade policy, external economies of scale

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Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.

Claims read by deepseek-v4.1-flash under definition version 3 (extract-v3) on 2026-10-11.

Classified by jev-1.13-20260917 (gold-guideline-v0.2) on 2026-10-11.

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Statistics and arithmetic are recomputed, not judged.

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