Industrial Policy, Lobbying, and the Direction of Technological Change

Adopting a two-sector overlapping generations model, this paper studies the influence of asymmetric technology absorption and producers' lobbying on the path of technological change. The underlying assumption of the paper is that, in its formulation of industrial policy, the government is open to the influence of producers' lobbying activities. Simulation results are threefold. First, biased institutions (i.e., lobbying rules) under the distorted government (i.e., the one open to lobbying) might, indeed, help drag the economy towards the right direction. In this process, current generations would experience welfare loss, while a technologically advantageous environment is prepared for future generations. Secondly, the undistorted government (i.e., the benevolent government) supports the path of capital-augmenting technological change, which is also the case when the distorted government introduces new lobbying rules leading to cost reductions in the investment goods producing sector. Thirdly, sectoral asymmetries in technology assimilation cannot correct the bias in the political market, and hence cannot be considered a critical factor determining the direction of technological change