Welfare Effects of Industrial policies: Theory and Evidence from India’s De-reservation Policy

Abstract

We study how industrial policies affect welfare depending on firms’ management practices. In a model of multi-product firms, we show that firms with better management practices are less adversely affected by an industrial policy that fosters market entry and competition. This result follows from firms with better management practices specializing in fewer products with lower marginal costs. Evidence from India’s de-reservation policy supports these predictions. Our simulations estimate a 0.29% welfare gain in India from the policy. The same policy could increase welfare by 0.39% in an environment with better management practices, such as those in the US, highlighting the role of management practices in shaping the effects of industrial policies.