Rational Atrophy: The U.S. Steel Industry

During the 1970s and 1980s the steel industry in the US enjoyed trade protection. However, higher prices were reflected in a higher wage premium relative to the rest of the manufacturing sector, and in a greater share of profits divested by integrated steel producers. Furthermore, available technological innovations were not adopted on a timely basis. This failure combined with trade protection, allowed new small firms (the minimills) to capture about 40% of the US steel market. In this paper we present a model that rationalizes these facts.