National champions: rewarding mediocrity

I have a piece up at Forbes.com trying to unravel why governments so unerringly back losers:

There’s a more sinister logic behind the pattern of government favoritism. Namely, firms in emerging, competitive industries have virtually no incentive to lobby for government hand-outs, while firms in aging, shrinking industries have the most to gain.
Here’s why: Firms in an open, competitive, growing young industry have little to gain from government support. More government funding for, say, biotechnology, is going to mean more biotechnology companies, more competition and (perhaps) more innovation. That might be good for America, but probably not much good for any single biotech company. Sure, they’ll all enjoy the government help, but each must weigh that assistance against the swarm of new competitors attracted by the handouts. No one firm would choose to hire top lobbyists and send them to D.C. to bring back the pork.
By contrast, firms in aging, shrinking, capital-intensive industries have everything to gain from government support. Because the industry is shrinking and it’s expensive to enter–think steel mills–the government subsidies and tax breaks are probably not going to attract new competitors. If there are no new competitors, the old guard gets to pocket all the money.

Tim Harford’s blog

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Tim, also known as the Undercover Economist, writes about the economics of everyday life.