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Government’s (In)ability to Precommit, and Strategic Trade Policy: The “Third Market” versus the “Home Market” Setup


  • Kresimir Zigic


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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  • Kresimir Zigic, 2007. "Government’s (In)ability to Precommit, and Strategic Trade Policy: The “Third Market” versus the “Home Market” Setup," CERGE-EI Working Papers wp319, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp319

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    References listed on IDEAS

    1. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, retirement, and social security," Economics Working Papers 383, Department of Economics and Business, Universitat Pompeu Fabra.
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    3. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
    4. Ranguelova, Elena & Feldstein, Martin, 2001. "Individual Risk in an Investment-Based Social Security System," Scholarly Articles 2797440, Harvard University Department of Economics.
    5. Martin Feldstein & Elena Ranguelova, 2001. "Individual Risk in an Investment-Based Social Security System," American Economic Review, American Economic Association, vol. 91(4), pages 1116-1125, September.
    6. John B. Shoven & Sita N. Slavov, 2006. "Political Risk Versus Market Risk in Social Security," NBER Working Papers 12135, National Bureau of Economic Research, Inc.
    7. Douglas H. Joines, 2005. "Pareto-Improving Social Security Reform," 2005 Meeting Papers 396, Society for Economic Dynamics.
    8. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
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    More about this item


    Government commitment; optimal tariffs and R&D subsides; first–best versus second–best strategic policy.;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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