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Cost effectiveness of R&D and strategic trade policy

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  • Praveen Kujal

    ()
    (Universidad Carlos III de Madrid)

  • Juan Ruiz

    ()
    (Banco de España)

Abstract

This paper analyzes the incentives for governments to impose export subsidies when firms invest in a cost saving technology before market competition. Governments first impose an export subsidy or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Thus, output subsidies seem more robust than implied by the recent literature.

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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0701.

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Length: 49 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:bde:wpaper:0701

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Keywords: product differentiation; strategic trade policy; policy reversals; r&d;

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References

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  1. Josep M. Vilarrubia, 2006. "Neighborhood effects in economic growth," Banco de Espa�a Working Papers 0627, Banco de Espa�a.
  2. Arturo Galindo & Alejandro Izquierdo & José Manuel Montero, 2006. "Real Exchange Rates, Dollarization and Industrial Employment in Latin America," Research Department Publications 4478, Inter-American Development Bank, Research Department.
  3. Fung, K. C. & Garcia-Herrero, Alicia & Iizaka, Hitomi & Siu, Alan, 2005. "Hard or Soft? Institutional Reforms and Infrastructure Spending as Determinants of Foreign Direct Investment in China," Santa Cruz Center for International Economics, Working Paper Series qt9377h519, Center for International Economics, UC Santa Cruz.
  4. Rubén Segura-Cayuela, 2006. "Inefficient policies, inefficient institutions and trade," Banco de Espa�a Working Papers 0633, Banco de Espa�a.
  5. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Banco de Espa�a Working Papers 0634, Banco de Espa�a.
  6. Juan F. Jimeno & Esther Moral & Lorena Saiz, 2006. "Structural breaks in labor productivity growth: the United States vs. the European Union," Banco de Espa�a Working Papers 0625, Banco de Espa�a.
  7. Praveen Kujal & Juan Ruiz, 2007. "Cost effectiveness of R&D and strategic trade policy," Banco de Espa�a Working Papers 0701, Banco de Espa�a.
  8. Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Banco de Espa�a Working Papers 0621, Banco de Espa�a.
  9. Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Banco de Espa�a Working Papers 0629, Banco de Espa�a.
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Cited by:
  1. Praveen Kujal & Juan Ruiz, 2007. "Cost effectiveness of R&D and strategic trade policy," Banco de Espa�a Working Papers 0701, Banco de Espa�a.
  2. Takauchi, Kazuhiro, 2012. "International R&D Rivalry with a Shipping Firm," MPRA Paper 36843, University Library of Munich, Germany.

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