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Government’s (In)ability to Precommit, and Strategic Trade Policy: The “Third Market” versus the “Home Market” Setup

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Author Info
Kresimir Zigic

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Abstract

We shift the usual perspective of strategic trade policy – the “third market setup” – to the “home market” framework in order to reconsider the consequences of government (in)ability to precommit to its policy and compare these findings with those analogous from the “third market setup”. In addition, we also analyze how robust the sign is of particular policy instruments (R&D subsidies) within the home market setup, as opposed to the third market setup, when there is a shift from “second–best” to the “first–best” policy. For that purpose, we apply a standard dynamic Cournot duopoly where the firm’s strategic variable is investment in cost reduction whereas policy instruments are import tariffs and R&D subsidies.

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Publisher Info
Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp319.

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Date of creation: Mar 2007
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Handle: RePEc:cer:papers:wp319

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Related research
Keywords: Government commitment; optimal tariffs and R&D subsides; first–best versus second–best strategic policy.;

Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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