Industrial Upgrade, Information Cost And Excess Capacity

Classical literature argues that excess capacity in the existing industries is mainly the result of game and competition. But classical literature can't give explanation to the following two facts which have been observed in real world:first, excess capacity is more likely to happen in newly upgrading industries than in traditional industries and excess capacity in newly upgrading industries is more severe than in traditional ones; second, excess capacity happens more frequently and is more serious in less developed countries than in developed ones. Hongsong Zhang(2008) builds a model with incomplete and asymmetric information from the perspective of development which explains the above two facts fairly well. However, there exists one obvious defect which can't be neglected in his model. He takes free information cost as one of the main assumptions which is not in accordance with reality. By relaxing this unreasonable and too strong assumption, we build a model incorporated with information cost and successful explain the above two empirical facts in an integrated framework. We argue that information cost can contribute to more serious excess capacity in upgrading industries. What's more, due to the facts that information cost in less developed countries is higher than in developed ones and industries in less developed countries lie in the inner part of the world industry chain, excess capacity in less developed countries has its own distinct.