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Last One Out Wins: Trade Policy in an International Exit Game

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  • S. Lael Brainard
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    Abstract

    This paper examines the effect of government intervention on the order and timing of firm exit in an international industry with fixed costs and declined demand. A dynamic inconsistency problem arises when the government is unable to precommit to a path of policy: it always intervenes to prolong the viability of the firm located in its market, even when the firm's survival is not the socially optimal outcome. The effect of tariff intervention is in all cases to terminate market operation prematurely, and in many cases to reverse the order of firm exit. Intervention in the absence of precommittment is never first best, and actually reduces welfare relative to the free market equilibrium when the differential between firms' fixed costs is large.

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    File URL: http://www.nber.org/papers/w3553.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3553.

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    Date of creation: Dec 1990
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    Publication status: published as International Economic Review, Feb. 1994, vo. 35, no. 1
    Handle: RePEc:nbr:nberwo:3553

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    Cited by:
    1. Brainard, S. Lael & Martimort, David, 1997. "Strategic trade policy with incompletely informed policymakers," Journal of International Economics, Elsevier, vol. 42(1-2), pages 33-65, February.

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