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Endogenous Choice of Subsidy Instruments in Imperfectly Competitive Markets: A Unit Subsidy versus an Ad Valorem Subsidy

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  • Nobuo Akai
  • Hikaru Ogawa
  • Yoshitomo Ogawa

Abstract

This paper analyzes the endogenous choice problem of subsidy instruments as production expansion (export-promotion) policies. We consider a two-region economy in which firms produce a homogeneous good and sell it in a third region. The government in each region provides a production subsidy to the domestic firm in either a unit or an ad valorem form. Our main result is that selection of a unit subsidy is the dominant strategy for each region and it is welfare superior to an ad valorem subsidy, which offers a justification for the unit subsidy assumption made in the existing literature. We explain the intuition behind this result using the properties of the best responses.

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  • Nobuo Akai & Hikaru Ogawa & Yoshitomo Ogawa, 2014. "Endogenous Choice of Subsidy Instruments in Imperfectly Competitive Markets: A Unit Subsidy versus an Ad Valorem Subsidy," Annals of Economics and Statistics, GENES, issue 113-114, pages 81-98.
  • Handle: RePEc:adr:anecst:y:2014:i:113-114:p:81-98
    DOI: 10.15609/annaeconstat2009.113-114.81
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