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Multilateral Subsidy Games

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  • Leahy, Dermot
  • Neary, J Peter

Abstract

This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are "friendly", raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6479.

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Date of creation: Sep 2007
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Handle: RePEc:cpr:ceprdp:6479

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Keywords: Industrial policy; Investment subsidies; Oligopoly; R&D spillovers; Strategic trade policy; Subsidy wars;

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  1. Seade, Jesus, 1980. "The stability of cournot revisited," Journal of Economic Theory, Elsevier, vol. 23(1), pages 15-27, August.
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  3. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier.
  4. Neary, J Peter, 2002. "Foreign Competition and Wage Inequality," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3420, C.E.P.R. Discussion Papers.
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  14. Dermot Leahy & J. Peter Neary, 2000. "Robust Rules for Industrial Policy in open Economies," Working Papers, School Of Economics, University College Dublin 200021, School Of Economics, University College Dublin.
  15. Haaland, Jan I. & Kind, Hans Jarle, 2004. "R&D Policies, Trade and Process Innovation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4784, C.E.P.R. Discussion Papers.
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  21. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
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Citations

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Cited by:
  1. Emmanuelle Auriol & Sara Biancini, 2012. "Powering Up Developing Countries through Integration?," CESifo Working Paper Series 3872, CESifo Group Munich.
  2. Pehr-Johan Norbäck, 2011. "Subsidizing Away Exports? A Note on R&D-policy Towards Multinational Firms," Journal of Industry, Competition and Trade, Springer, Springer, vol. 11(1), pages 25-42, March.
  3. Naoto Jinji, 2013. "Comparative Statics for Oligopoly: A Generalized Result," Discussion papers e-12-011, Graduate School of Economics Project Center, Kyoto University.
  4. Neary, J. Peter, 2009. "Two and a Half Theories of Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7600, C.E.P.R. Discussion Papers.
  5. Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2010. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7752, C.E.P.R. Discussion Papers.
  6. Peter Neary & Dermot Leahy, 2010. "Oligopoly and Trade," Economics Series Working Papers 517, University of Oxford, Department of Economics.
  7. Mario Mariniello, 2013. "Should Variable Cost Aid to Attract Foreign Direct Investment be Banned? A European Perspective," Journal of Industry, Competition and Trade, Springer, Springer, vol. 13(2), pages 273-308, June.
  8. Armando Garcia Pires, 2012. "International trade and competitiveness," Economic Theory, Springer, Springer, vol. 50(3), pages 727-763, August.
  9. Daniel Bernhofen & Raymond Riezman, 2009. "Introduction: ‘New directions in international trade theory’," Economic Theory, Springer, Springer, vol. 41(1), pages 1-3, October.
  10. Stephen Jui-Hsien Chou, 2013. "R&D Policy Competition with Process Innovation in a Multi-Product Duopoly," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 53-76, November.

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