Union behavior, industry rents, and optimal policies

This paper examines the welfare gains from strategic industrial policy in t he U.S. steel industry, focusing on the role of capacity utilization and th e potential gains from capturing labor rents. With underutilized capacity, strategic policies to capture labor rents lead to an endogenous response th at diminishes their importance. On the other hand, reducing domestic labor market distortions results in welfare gains nearly as large as those from t he optimal subsidy. This suggests that the focus on labor rents as the subj ect of industrial policy is overstated, at least in manufacturing industrie s such as integrated steel. (C) 2000 Elsevier Science B.V. All rights reser ved.