Industrial Targeting, Experimentation and Long-Run Specialization

Title: Industrial Targeting, Experimentation and Long-Run Specialization
Format: Journal Article
Publication Date: February 2004
Published In: Journal of Development Economics

This paper emphasizes the experimental nature of industrial targeting policies under uncertainty in a small open economy. A government promotes entry of new firms in selected industries and updates its beliefs about the country's comparative advantage in a Bayesian way. This selective targeting policy is analyzed in the framework of a special type of statistical decision problem known as the multi-armed bandit. The paper analyzes how the costs and benefits of learning about a country's comparative advantage depend on the characteristics of the targeted industries. The framework suggests that even an optimally designed industrial targeting policy may eventually steer the country away from specializing according to its true comparative advantage.

Ivan Allen College Contributors:

Klimenko, Mikhail M. "Industrial Targeting, Experimentation, and Long-Run Specialization." Journal of Development Economics 73.1 (2004):  75-105.

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  • School of Economics