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Free Trade Vs. Strategic Trade: A Peek into Pandora's Box

  • Grossman, Gene
  • Maggi, Giovanni

We investigate whether a welfare-maximizing government ought to pursue a programme of strategic trade intervention or instead commit itself to free trade when, in the former case, domestic firms will have an opportunity to manipulate the government’s choice of the level of intervention. Domestic firms may over-invest in physical and knowledge capital in a regime of strategic intervention in order to influence the government’s choice of subsidy. In the event, a commitment to free trade may be desirable even in settings where profit-shifting would be possible. We analyse the desirability of such a commitment when the government is well informed about firms’ types and actions, and when it suffers from an informational disadvantage.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1784.

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Date of creation: Jan 1998
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Handle: RePEc:cpr:ceprdp:1784
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  1. 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.
  2. Maggi, G & Rodriguez-Clare, A, 1996. "The Value of Trade Agreements in the Presence of Political Pressures," Papers 180, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Maggi, G., 1997. "Strategic Trade Policy Under Incomplete Information," Papers 189, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Schulman, Craig T, 1997. "Free Entry, Quasi-free Trade, and Strategic Export Policy," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 83-100, February.
  5. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May.
  6. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  7. Goldberg, Pinelopi Koujianou, 1995. "Strategic Export Promotion in the Absence of Government Precommitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 407-26, May.
  8. Barbara J. Spencer & James A. Brander, 1983. "International R&D Rivalry and Industrial Strategy," NBER Working Papers 1192, National Bureau of Economic Research, Inc.
  9. Neary, James Peter, 1991. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Discussion Papers, Series II 147, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  10. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
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