Industrial Upgrade, Incomplete Information And Excess Capacity In The Development Perspective

Classical literature mainly explains excess capacity in the setup of competition in existing industries. However, recent empirical evidence finds several important facts: 1) excess capacity usually happens in newly updating industries, in which excess capacity is usually more serious than that in traditional industries; 2) excess capacity is usually more frequent and serious in developing countries compared with developed ones, which cannot be explained consistently by classical literature in this field. This paper explains excess capacity from the development perspective. Through a simple model with incomplete and asymmetric information, we argues that excess capacity in updating industries originates from coordination failure of potential entrants to this new industry, and the coordination failure is caused by information loss and limited herding in a sequential game. Moreover, the different level of excess capacity in developed and developing countries is due to their different characteristics of updating industries.