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Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry

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  • Gene M. Grossman
  • Henrik Horn
Abstract
In industries with imperfect consumer information, the lack of a reputation puts latecomers at a competitive disadvantage vis-à-vis established firms. We consider whether the existence of such informational barriers to entry provides a valid reason for temporarily protecting infant producers of experience goods and services. Our model incorporates both moral hazard in an individual firm's choice of quality and adverse selection among potential entrants into the industry. We find that infant-industry protection often exacerbates the welfare loss associated with these market imperfections.

Suggested Citation

  • Gene M. Grossman & Henrik Horn, 1988. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 767-787.
    • Handle: RePEc:oup:qjecon:v:103:y:1988:i:4:p:767-787.
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    1. Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn.
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    6. Joseph Farrell, 1986. "Moral Hazard as an Entry Barrier," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 440-449, Autumn.
    7. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 659-679.
    8. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
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