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Multilateral Subsidy Games

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  • Peter Neary
  • Dermot Leahy

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 University of Oxford, Department of Economics in its series Economics Series Working Papers with number 346.

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Date of creation: 01 Sep 2007
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Handle: RePEc:oxf:wpaper:346

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Keywords: Industrial Policy; Investment Subsidies; Subsidy Wars; Strategic Trade Policy; R&D Spillovers; Oligopoly;

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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.
  2. Dermot Leahy & J Peter Neary, 2004. "Symmetric Research Joint Ventures - Cooperative Substitutes and Complements," Working Papers 200417, School Of Economics, University College Dublin.
  3. Jan Haaland & Hans Jarle Kind, 2006. "Cooperative and Non-Cooperative R&D Policy in an Economic Union," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(4), pages 720-745, December.
  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.
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  7. Dermot Leahy & J. Peter Neary, 2001. "Robust rules for industrial policy open economies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 393-409.
  8. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  9. Leahy, Dermot & Neary, J Peter, 1997. "Public Policy towards R&D in Oligopolistic Industries," American Economic Review, American Economic Association, vol. 87(4), pages 642-62, September.
  10. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
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  13. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  14. Neary, J Peter, 2002. "Foreign Competition and Wage Inequality," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 680-93, November.
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  16. Barbara J. Spencer & James A. Brander, 1982. "International R&D Rivalry and Industrial Strategy," Working Papers 518, Queen's University, Department of Economics.
  17. 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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  19. 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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Citations

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Cited by:
  1. Naoto Jinji, 2013. "Comparative Statics for Oligopoly: A Generalized Result," Discussion papers e-12-011, Graduate School of Economics Project Center, Kyoto University.
  2. Norbäck, Pehr-Johan, 2010. "Subsidizing Away Exports? A Note on R&D-policy towards Multinational Firms," Working Paper Series 832, Research Institute of Industrial Economics.
  3. Daniel Bernhofen & Raymond Riezman, 2009. "Introduction: ‘New directions in international trade theory’," Economic Theory, Springer, vol. 41(1), pages 1-3, October.
  4. Peter Neary & Dermot Leahy, 2010. "Oligopoly and Trade," Economics Series Working Papers 517, University of Oxford, Department of Economics.
  5. Auriol, Emmanuelle & Biancini, Sara, 2013. "Powering up developing countries through integration ?," Policy Research Working Paper Series 6494, The World Bank.
  6. Mario Mariniello, 2013. "Should Variable Cost Aid to Attract Foreign Direct Investment be Banned? A European Perspective," Journal of Industry, Competition and Trade, Springer, vol. 13(2), pages 273-308, June.
  7. Armando Garcia Pires, 2012. "International trade and competitiveness," Economic Theory, Springer, vol. 50(3), pages 727-763, August.
  8. Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2009. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," Working Paper Series 807, Research Institute of Industrial Economics, revised 23 Jul 2013.
  9. Neary, J. Peter, 2009. "Two and a Half Theories of Trade," CEPR Discussion Papers 7600, C.E.P.R. Discussion Papers.
  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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