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An Experimental Test of Strategic Trade Policy

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  • Dirk Engelmann
  • Hans-Theo Normann

Abstract

In this experiment, we analyze the model of strategic trade policy proposed by Brander and Spencer (1985). Governments can choose whether or not to subsidize domestic firms. Firms compete in a Cournot duopoly, and they know the subsidy decisions when choosing output. Although the theoretical prediction is that firms are subsidized, it turns out that governments only rarely subsidize in experimental markets. Not subsidizing is rational given our observation that firms do not play according to the subgame perfect equilibrium when subsidies are given.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp212.

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Date of creation: Jun 2003
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Handle: RePEc:cer:papers:wp212

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Keywords: Commercial policy; experimental economics; strategic commitment;

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References

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  1. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Sailesh Gunessee, 2009. "Strategic Tax Competition: An Experimental Study," ICBBR Working Papers 5, International Centre for Behavioural Business Research.
  2. GEORGANTZIS, Nikolaos & moner-colonques, Rafael & ORTS, Vicente & SEMPERE-MONERRIS, José J., 2012. "Theoretical and experimental insights on firms’ internationalization decisions under uncertainty," CORE Discussion Papers 2012041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Dirk Engelmann & Hans-Theo Normann, 2003. "An Experimental Test of Strategic Trade Policy," CERGE-EI Working Papers wp212, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  4. Sacco, Dario & Schmutzler, Armin, 2011. "Is there a U-shaped relation between competition and investment?," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 65-73, January.

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