Government’s (In)ability to Precommit, and Strategic Trade Policy: The “Third Market” versus the “Home Market” Setup
We shift the usual perspective of strategic trade policy – the “third market setup” – to the “home market” framework in order to reconsider the consequences of government (in)ability to precommit to its policy and compare these findings with those analogous from the “third market setup”. In addition, we also analyze how robust the sign is of particular policy instruments (R&D subsidies) within the home market setup, as opposed to the third market setup, when there is a shift from “second–best” to the “first–best” policy. For that purpose, we apply a standard dynamic Cournot duopoly where the firm’s strategic variable is investment in cost reduction whereas policy instruments are import tariffs and R&D subsidies.
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