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Free Trade vs. Strategic Trade: A Peek into Pandora's Box

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Author Info
Gene M. Grossman
Giovanni Maggi

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Abstract

We investigate whether a welfare-maximizing government ought to pursue a program of" strategic trade intervention or instead commit itself to free trade when domestic firms will have an opportunity to manipulate the government's choice of the level of" intervention. Domestic firms may overinvest in physical and knowledge capital in a regime of" strategic intervention in order to influence the government's choice of subsidy. In the event commitment to free trade may be desirable even in settings where profit-shifting would be" possible. We analyze the desirability of such a commitment when the government is well" informed about firms' types and actions, and when it suffers from an informational disadvantage."

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6211.

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Date of creation: Oct 1997
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Publication status: published as Global Integration and Competition, R. Sato, R.V. Ramachandran and K. Minoeds., Boston/Dordrecht/London: Kluwer Academic Publishers, 1998.
Handle: RePEc:nbr:nberwo:6211

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F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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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. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May. [Downloadable!] (restricted)
  3. Schulman, Craig T, 1997. "Free Entry, Quasi-free Trade, and Strategic Export Policy," Review of International Economics, Blackwell Publishing, vol. 5(1), pages 83-100, February.
  4. Goldberg, Pinelopi Koujianou, 1995. "Strategic Export Promotion in the Absence of Government Precommitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 407-26, May. [Downloadable!] (restricted)
  5. Spencer, Barbara J & Brander, James A, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Blackwell Publishing, vol. 50(4), pages 707-22, October. [Downloadable!] (restricted)
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  6. 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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  7. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
  8. Maggi, G & Rodriguez-Clare, A, 1996. "The Value of Trade Agreements in the Presence of Political Pressures," Papers 180, Princeton, Woodrow Wilson School - Public and International Affairs.
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  9. Maggi, G., 1997. "Strategic Trade Policy Under Incomplete Information," Papers 189, Princeton, Woodrow Wilson School - Public and International Affairs.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gerda Dewit & Dermot Leahy, 2001. "Rivalry In Uncertain Export Markets: Commitment Versus Flexibility," Economics, Finance and Accounting Department Working Paper Series n1050201, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
    Other versions:
  2. Dermot Leahy, J. Peter Neary, 2001. "Robust rules for industrial policy open economies," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 10(4), pages 393-409, December. [Downloadable!] (restricted)
  3. Everaert, Greetje M.M., 2004. "The Political Economy of Restructuring and Subsidisation: An International Perspective," BOFIT Discussion Papers 12/2004, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  4. Leahy, Dermot & Neary, J Peter, 2001. "Robust Rules for Industrial Policy in Open Economies," CEPR Discussion Papers 2731, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. J.P Neary & D Leahy, 1998. "Strategic Trade and Industrial PolicyTowards Dynamic Oligopolies," CEP Discussion Papers 0409, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  6. Ionascu, Delia & Zigic, Kresimir, 2001. "Free Trade versus Strategic Trade as a Choice Between Two 'Second-best' Policies: A Symmetric versus Asymmetric Information Analysis," CEPR Discussion Papers 2928, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Kyle Bagwell & Robert W. Staiger, 2002. "GATT-think," Discussion Papers 0102-39, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
    • Kyle Bagwell & Robert W. Staiger, 2000. "GATT-Think," NBER Working Papers 8005, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    • Bagwell,K. & Staiger,R.W., 2000. "GATT-think," Working papers 19, Wisconsin Madison - Social Systems. [Downloadable!]
  8. J.P Neary & P O'Sullivan, 1998. "Beat 'Em or Join 'Em: Export Subsidies versus International Research Joint Ventures in Oligopolistic Markets," CEP Discussion Papers 0408, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
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