When to Push? Market Forces, Government Intervention, and the Optimal Timing of Industrial Policy-NSE Workshop-The Institute of New Structural Economics at Peking University (INSE)

Events

NSE Workshop

When to Push? Market Forces, Government Intervention, and the Optimal Timing of Industrial Policy

Mar 05, 2026

Time: 10:00 am - 11:30 am, Mar. 11^th, 2026

Speaker: Xuewen Liu (The University of Hong Kong)

Venue: 1F, Zhifuxuan Classrom, Langrun Garden, Peking University

Abstract：

When is industrial policy effective? We develop a theory in which effectiveness hinges on timing. Market evolution---driven by factor price changes, technological progress, or demand shifts---gradually enhances a technology's private competitiveness, yet diffusion is stalled by adoption externalities where productivity takes off only after aggregate adoption exceeds a critical mass. A planner can use subsidies to push adoption across this threshold but faces a dynamic tradeoff: intervening too early incurs high market distortion costs, while intervening too late forgoes large externality gains. The model characterizes a precise window for welfare-improving intervention, pinned down by closing the wedge between private and social Euler equations. We apply this framework to China's agricultural mechanization (1979--2020), where capital-intensive tractors gradually displaced labor-intensive draft animals and mechanization rose from roughly 20% to 70%. We show that market forces---specifically a declining capital-to-labor price ratio---primarily drove the initial transition, but the government's targeted subsidies introduced in 2004 accelerated adoption near the critical threshold, increasing mechanization by 20 percentage points with sizable welfare gains. Counterfactual analysis suggests that either earlier (premature) or later (delayed) intervention would have resulted in significant welfare losses. Our findings underscore that effective industrial policy does not override market forces but strategically amplifies their natural momentum.

Speaker：

Xuewen Liu.png

Professor Xuewen Liu is currently a full professor at HKU. Prior to joining HKU, he was an associate professor and an assistant professor at HKUST and was an assistant professor at Imperial College Business School. He obtained his Ph.D. degree at London School of Economics (LSE). Professor Liu is an economic theorist. His research areas include financial economics (corporate finance, financial markets, financial institutions, and financial crises), macroeconomics, growth and development, and Chinese economy. Professor Liu has published in leading finance and economics journals, such as Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Economic Theory, Journal of Monetary Economics.