Measuring the effect of the infant industry protection

This paper examines the Japanese automobile industry to measure the effect of import restriction policy for infant industry. Import restriction policy can provide large amount of domestic demand for producers and help them to acquire the experience of production. It has been said to be a key driving force of the dramatic growth of the Japanese automobile industry. Compared with a subsidy policy, however, an import restriction causes some types of distortions. Conducting the counterfactual exercise, I explore what it would have happened if instead the optimal subsidy had been provided to Japanese automakers. This exercise measures the welfare effect of an actual restriction policy in terms of an optimal one. That is, it quantifies how close the welfare level of the actual policy was to the level of the optimal subsidy policy. From the experimental exercise, I find the fact that the import restriction reached to only 55 percent of the optimal welfare level. ∗I have benefited from the comments of my advisors, Hiroyuki Odagiri and Yukinobu Kitamura. The research has benefited from the financial supports of a grant-inaid (the 21st Century Center of Excellence Project on the Normative Evaluation and Social Choice of Contemporary Economic Systems) from the Ministry of Education and Science, Japan. All errors, of course, remain my responsibility. †Graduate School of Economics, Hitotsubashi University. [email protected]