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

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  • Gene M. Grossman
  • Giovanni Maggi

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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Bibliographic Info

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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  1. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(357), pages 95-106, March.
  2. Spencer, Barbara J & Brander, James A, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(4), pages 707-22, October.
  3. Maggi, G., 1997. "Strategic Trade Policy Under Incomplete Information," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 189, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Schulman, Craig T, 1997. "Free Entry, Quasi-free Trade, and Strategic Export Policy," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 5(1), pages 83-100, February.
  5. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, Elsevier, vol. 37(3-4), pages 197-218, November.
  6. Maggi, G & Rodriguez-Clare, A, 1996. "The Value of Trade Agreements in the Presence of Political Pressures," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 180, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, Elsevier, vol. 36(3-4), pages 333-354, May.
  8. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 407-26, May.
  9. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(3), pages 488-511, June.
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:
  1. Gerda Dewit & Dermot Leahy, 2002. "Time-To-Build Investment and Uncertainty in Oligopoly," Working Papers, School Of Economics, University College Dublin 200207, School Of Economics, University College Dublin.
  2. Dewit, Gerda & Leahy, Dermot, 2001. "Rivalry in Uncertain Export Markets: Commitment versus Flexibility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2771, C.E.P.R. Discussion Papers.
  3. 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, C.E.P.R. Discussion Papers 2928, C.E.P.R. Discussion Papers.
  4. Dermot Leahy & J. Peter Neary, 2001. "Robust rules for industrial policy open economies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(4), pages 393-409.
  5. Kyle Bagwell & Robert W. Staiger, 2002. "GATT-think," Discussion Papers, Columbia University, Department of Economics 0102-39, Columbia University, Department of Economics.
  6. Delia Ionascu & Kresimir Zigic, 2001. "Strategic Trade Policy and Mode of Competition: Symmetric versus Asymmetric Information," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp174, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  7. J. Peter Neary & Paul O'Sullivan, 1998. "Beat 'em or join 'em: export subsidies versus international research joint ventures in oligopolistic markets," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20247, London School of Economics and Political Science, LSE Library.
  8. Dewit, Gerda & Leahy, Dermot, 2006. "Investment timing under uncertainty in oligopoly: Symmetry or leadership?," Journal of Economics and Business, Elsevier, Elsevier, vol. 58(1), pages 1-19.
  9. Everaert, Greetje M.M., 2004. "The Political Economy of Restructuring and Subsidisation: An International Perspective," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 12/2004, Bank of Finland, Institute for Economies in Transition.
  10. 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.
  11. Gerda Dewit & Dermot Leahy, 2001. "Rivalry In Uncertain Export Markets: Commitment Versus Flexibility," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n1050201, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.

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