Mild Government Failure
A relatively mild form of government failure - for example, bureaucrats can count but do not differentiate quality - can significantly affect the efficacy of industrial policy. We investigate this idea in the context of China's largest pro-innovation industrial policy using a structural model. We find that the return to the subsidy program is -19.7\% (but would be 7.8\% if the mild government failure can be removed). Furthermore, the welfare loss is exacerbated by patent trade.
We thank Daniel Xu, Nancy Qian, Ken Rogoff, Joe Stiglitz, Carlos Serrano and seminar and conference participants at the NBER Chinese Economy meeting, Columbia University, Emory University, World Bank, Asian Bureau of Financial and Economic Research (ABFER), and Asian Innovation and Entrepreneurship Association (AIEA) for their helpful comments and suggestions. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.