Strategic Trade Policy With Domestic Cost Asymmetries
In this paper we examine optimal strategic trade p[olicy under oligopoly with many home and foreign firms when the firms have different levels of efficiency and where a trade-off exists between the subsidy bill and firms profits. The first-best policy involves a structure of firm specific export subsidies and export taxes in which the government favours the most efficient firms unless the social cost of funds is sufficiently high. Whenoptimal policy is constrained to a uniform subsidy the optimal policy depends on the relative number of home and foreign firms and the curvature of demnand. Deficiencies of the uniform subsidies are examined.
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