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A note on the time inconsistency of strategic trade policy

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  • Peter Welzel

Abstract

In a simple three-stage model of an international Cournot duopoly, optimal strategic trade policy is shown to be time inconsistent. If the domestic government first announces a production subsidy, firms then irrevocably commit resources to R&D, and finally play their output game, there is an incentive for the government to revise its ex ante optimal policy once R&D decisions have been made. If private agents anticipate this revision and if the government does not have the power to commit itself to the ex ante optimal policy, a credibility constraint has to be imposed. Copyright Kluwer Academic Publishers 1992

Suggested Citation

  • Peter Welzel, 1992. "A note on the time inconsistency of strategic trade policy," Open Economies Review, Springer, vol. 3(2), pages 203-214, June.
  • Handle: RePEc:kap:openec:v:3:y:1992:i:2:p:203-214 DOI: 10.1007/BF01886204
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    References listed on IDEAS

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    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, pages 1133-1137.
    2. Paul Krugman, 1986. "Strategic Trade Policy and the New International Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610450, January.
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    4. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 383-406.
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    6. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
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    8. Krugman, Paul R, 1987. "Is Free Trade Passe?," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 131-144, Fall.
    9. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, pages 1133-1137.
    10. Lapan, Harvey E, 1988. "The Optimal Tariff, Production Lags, and Time Consistency," American Economic Review, American Economic Association, pages 395-401.
    11. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, pages 83-100.
    12. Lapan, Harvey E, 1988. "The Optimal Tariff, Production Lags, and Time Consistency," American Economic Review, American Economic Association, pages 395-401.
    13. F. H. Hahn, 1962. "The Stability of the Cournot Oligopoly Solution," Review of Economic Studies, Oxford University Press, vol. 29(4), pages 329-331.
    14. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, pages 823-837.
    15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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