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Does 'Non-Committed' Government Always Generate Lower Social Welfare then its 'Committed' Counter-Part

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  • Zigic, Kresimir

Abstract

We compare the social welfare generated by a domestic government in two types of policy set-ups: a ‘commitment’ regime in which government sets its policy instrument before the strategic choice by a domestic firm and a ‘non-commitment’ regime where the policy variable is set after the firm’s strategic choice. The government implements strategic trade policy in the form of optimal tariffs under which domestic and foreign firms compete in quantities in an imperfectly competitive domestic market where cost reducing R&D spillovers take place from the domestic to the foreign firm. We show that the ‘non-committed’ government generally achieves a higher welfare and levies a lower optimal tariff than the ‘committed’ government. Moreover, when the domestic government is allowed to use an R&D subsidy, which may or may not be accompanied by the optimal tariff, the resulting optimal subsidies are always positive.

Suggested Citation

  • Zigic, Kresimir, 2003. "Does 'Non-Committed' Government Always Generate Lower Social Welfare then its 'Committed' Counter-Part," CEPR Discussion Papers 3946, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3946
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    Cited by:

    1. Lommerud, Kjell Erik & Olsen, Trond E. & Straume, Odd Rune, 2006. "Cross border mergers and strategic trade policy with two-part taxation: is international policy coordination beneficial?
      [Grenzüberschreitende Fusionen und strategische Handelspolitik mit zweiseiti
      ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-24, Social Science Research Center Berlin (WZB).

    More about this item

    Keywords

    first versus second best strategic policy; government commitment; optimal tariffs and subsidies; technological spillovers;

    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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