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We present a hold‐up model of investment where active industrial policy promotes both corruption and investment. Since corruption deters investment, the effect of industrial policy on investment is lower than when corruption is absent. We find evidence suggesting that corruption is indeed higher in countries pursuing active industrial policies. Policy implications are illustrated by decomposing the total effect of industrial policy into a positive, direct effect, and a negative, corruption‐induced effect. In the presence of corruption, the total effect of industrial policy on investment ranges between 84 and 56% of the direct impact. The magnitude of these corrections suggests that corruption considerations should not be absent from cost‐benefit analyses of industrial policies.
Ades et al. (Tue,) studied this question.