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Can Industrial Policy overcome Coordination Failures: Theory and Evidence
This paper introduces a method to study the impact of policy events on equilibrium selection in settings where strong complementarities may lead to multiple equilibria and coordination failures. Many industrial policies are rooted in the idea of coordination failures and big-push’ theories, yet empirical evidence on their effectiveness remains limited, since distinguishing equilibrium shifts from direct changes in fundamentals is challenging. Leveraging tools from industrial organization and algebraic geometry, I develop an approach to study coordination effects without imposing strong assumptions on the distribution or responsiveness of economic fundamentals. The method identifies the `types’ of factual and counterfactual equilibria through a three-step procedure: model estimation and inversion, equilibrium enumeration, and type assignment. Types of factual equilibria may be used to examine how events, like urban infrastructure, subsidy drives, or trade liberalization, affect equilibrium selection. Types of counterfactual equilibria further allow decomposition of observed effects into fundamentals- versus coordination-driven. I apply this method to study industrial zones in India. Using a newly assembled dataset, I find that municipalities receiving an industrial zone see a 60% increase in non-farm employment over 15 years, with significant spill overs to non-targeted sectors and municipalities. Combining the methodology with event study designs, I find that industrial zones increase the probability of escaping a low-industrialization equilibrium by 38%, with coordination effects explaining roughly one-third of the observed change in outcomes.
Date:
11 November 2025, 16:00
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Skills Lab
Speaker:
Tishara Garg (Princeton University)
Organising department:
Department of Economics
Part of:
Applied Microeconomics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Edward Valenzano
