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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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Related research

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

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References

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  1. Leahy, Dermot & Neary, J. Peter, 2005. "Symmetric research joint ventures: Cooperative substitutes and complements," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 381-397, June.
  2. Leahy, Dermot & Neary, J Peter, 1998. "Strategic Trade and Industrial Policy Towards Dynamic Oligopolies," CEPR Discussion Papers 1968, C.E.P.R. Discussion Papers.
  3. J Peter Neary, 2001. "Foreign Competition and Wage Inequality," Working Papers 200102, School Of Economics, University College Dublin.
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  8. Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR & CES & MSH, vol. 14(28), pages 13-53, 04.
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  14. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
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  17. Henriques, Irene, 1990. "Cooperative and Noncooperative R&D in Duopoly with Spillovers: Comment," American Economic Review, American Economic Association, vol. 80(3), pages 638-40, June.
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  19. David R Collie, 2005. "State aid to investment and R&D," European Economy - Economic Papers 231, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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  21. David Collie, 2002. "Prohibiting State Aid in an Integrated Market: Cournot and Bertrand Oligopolies with Differentiated Products," Journal of Industry, Competition and Trade, Springer, vol. 2(3), pages 215-231, September.
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Citations

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Cited by:
  1. Leahy, Dermot & Neary, J Peter, 2010. "Oligopoly and Trade," CEPR Discussion Papers 8172, C.E.P.R. Discussion Papers.
  2. Daniel Bernhofen & Raymond Riezman, 2009. "Introduction: ‘New directions in international trade theory’," Economic Theory, Springer, vol. 41(1), pages 1-3, October.
  3. Pehr-Johan Norbäck, 2011. "Subsidizing Away Exports? A Note on R&D-policy Towards Multinational Firms," Journal of Industry, Competition and Trade, Springer, vol. 11(1), pages 25-42, March.
  4. Neary, J. Peter, 2009. "Two and a Half Theories of Trade," CEPR Discussion Papers 7600, C.E.P.R. Discussion Papers.
  5. Emmanuelle Auriol & Sara Biancini, 2012. "Powering Up Developing Countries through Integration?," CESifo Working Paper Series 3872, CESifo Group Munich.
  6. Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2009. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," Working Paper Series 807, Research Institute of Industrial Economics.

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