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Rivalry in uncertain export markets: commitment versus flexibility

  • Dewit, Gerda
  • Leahy, Dermot

This Paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms’ investment decisions. When the government can commit to an export subsidy, it may choose to over- or under-subsidize to deter private-sector capital commitment. When the government chooses its trade policy flexibly, the relative value of commitment to the unsubsidized foreign firm is greater than to the subsidized home firm. Finally, a flexible subsidy regime is compared to free trade.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 64 (2004)
Issue (Month): 1 (October)
Pages: 195-209

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Handle: RePEc:eee:inecon:v:64:y:2004:i:1:p:195-209
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  17. Gerda Dewit & Dermot Leahy, 2001. "Fighting over Uncertain Demand: Investment Commitment versus Flexibility," Economics, Finance and Accounting Department Working Paper Series n1060201, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
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