Short-Term Infant Industry Protection

A two-good model of small open economy, in which production of one good is characterized by an extra-firms, intra-industry externality, is constructed. In contrast to previous studies of infant-industry protection, the planning horizon is considered to be finite. The conditions under which protection is justified are determined and the factors that influence the time path of the optimal subsidy are shown to be the length of the planning horizon, the scale of the externality, and the rate of time discounting applied.