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

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  • Kresimir Zigic

Abstract

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.

Suggested Citation

  • 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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    More about this item

    Keywords

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

    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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