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A note on the time inconsistency of strategic trade policy

  • Peter Welzel

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

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 3 (1992)
Issue (Month): 2 (June)
Pages: 203-214

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Handle: RePEc:kap:openec:v:3:y:1992:i:2:p:203-214
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  1. Driffill, John, 1987. "Macroeconomic Policy Games with Incomplete Information - A Survey," The Warwick Economics Research Paper Series (TWERPS) 288, University of Warwick, Department of Economics.
  2. Lapan, Harvey E., 1988. "The Optimal Tariff, Production Lags and Time Consistency," Staff General Research Papers 10816, Iowa State University, Department of Economics.
  3. 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.
  4. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  5. Paul Krugman, 1986. "Strategic Trade Policy and the New International Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610450, June.
  6. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-37, December.
  7. Krugman, Paul R, 1987. "Is Free Trade Passe?," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 131-44, Fall.
  8. Staiger, Robert W. & Tabellini, Guido, 1989. "Rules and discretion in trade policy," European Economic Review, Elsevier, vol. 33(6), pages 1265-1277, July.
  9. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  10. Barbara J. Spencer & James A. Brander, 1982. "International R&D Rivalry and Industrial Strategy," Working Papers 518, Queen's University, Department of Economics.
  11. 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 473-91, June.
  12. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-37, December.
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