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Losers, Winners and Prisoner's Dilemma in International Subsidy Wars

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Author Info
Garcia Pires, Armando José

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Abstract

Two central results in the strategic trade literature are that governments shall support winners and that there is a policy prisoner dilemma in international subsidy wars (i.e. countries have incentives to support local firms but they would be better off by cooperating to not intervene). We show that exactly the contrary holds when asymmetries between firms are endogenous. Specifically, the incentives to support are bigger for loser firms given that intervention can aim at making them winners (competitiveness shifting effects). As a result the countries that host less competitive firms always prefer intervention. We illustrate this with the Airbus-Boeing case.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5979.

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Date of creation: Dec 2006
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Handle: RePEc:cpr:ceprdp:5979

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Related research
Keywords: Airbus; asymmetric firms; Boeing; R&D investment; R&D subsidies;

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  2. Richard J. Rosen, 1991. "Research and Development with Asymmetric Firm Sizes," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 411-429, Autumn. [Downloadable!] (restricted)
  3. David de Meza, 1986. "Export Subsidies and High Productivity: Cause or Effect?," Canadian Journal of Economics, Canadian Economics Association, vol. 19(2), pages 347-50, May. [Downloadable!] (restricted)
  4. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March. [Downloadable!] (restricted)
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  5. Hwang, Hae-Shin & Schulman, Craig T., 1993. "Strategic non-intervention and the choice of trade policy for international oligopoly," Journal of International Economics, Elsevier, vol. 34(1-2), pages 73-93, February. [Downloadable!] (restricted)
  6. Kyle Bagwell, 1992. "Commitment and Observability in Games," Discussion Papers 1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Dixit, Avinash K & Kyle, Albert S, 1985. "The Use of Protection and Subsidies for Entry Promotion and Deterrence," American Economic Review, American Economic Association, vol. 75(1), pages 139-52, March. [Downloadable!] (restricted)
  8. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn. [Downloadable!] (restricted)
  9. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Cooper, Russell & Riezman, Raymond, 1989. "Uncertainty and the Choice of Trade Policy in Oligopolistic Industrie s," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 129-40, January. [Downloadable!] (restricted)
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  11. repec:rus:hseeco:122439 is not listed on IDEAS
  12. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Entry and Asymmetric Lobbying: Why Governments Pick Losers," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 1064-1093, 09. [Downloadable!] (restricted)
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  13. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February. [Downloadable!] (restricted)
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  14. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November. [Downloadable!] (restricted)
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  15. Irwin, Douglas A. & Pavcnik, Nina, 2004. "Airbus versus Boeing revisited: international competition in the aircraft market," Journal of International Economics, Elsevier, vol. 64(2), pages 223-245, December. [Downloadable!] (restricted)
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  16. Leahy, Dermot & Neary, J Peter, 1997. "Public Policy towards R&D in Oligopolistic Industries," American Economic Review, American Economic Association, vol. 87(4), pages 642-62, September. [Downloadable!] (restricted)
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