On Optimum Subsidy to a Learning Industry: An Aspect of the Theory of Infant-Industry Protection

In this paper2 we take a very simple dynamic model of by doing in an open economy and work out the optimum extent and time-path of protection to the learning industry. (In contrast, usual analysis stops at merely pointing out the need for protection in such cases.) In a brief digression in Section 2, we also mention some of the implications for the standard results. of positive trade theory (regarding patterns of factor prices, output, comparative advantage, etc.) when one introduces the learning effect. We have two goods, c and m, that use capital, K, and labour, L, in production under constant returns to scale. The learning effect which increases productivity of factors depends on the cumulated volume of output in an industry.3 Since the infant-industry argument is based (at least implicitly)