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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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