Supply Chain Disruption and Precautionary Industrial Policy

• Authors: Massimo Motta and Michele Polo
• International Journal of Industrial Organization, Vol. 104, January 2026

The paper analyzes the design of industrial policies to improve the efficiency of a local input when there is a risk of international supply chain disruption. We first establish a case for research subsidies in a monopolistic setting: private investment to improve the inferior technology is lower than the socially optimal one. Then, considering several market environments differing in size, structure and appropriability of the innovation, we analyze private and welfare-maximizing investments and optimal transfers. Subsidies are always optimal with both monopolies and research joint-ventures, whereas under some circumstamces (notably, when there is high appropriability of an innovation and investment costs are sufficiently low) a tax might be optimal under duopoly. Research joint-ventures in an integrated market or a public reseach lab socially outperform the other environments since they benefit from a larger integrated market and a wider circulation of the innovation while preserving competition.