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The Role Of Export Subsisies When Product Quality Is Unknown

  • Kyle Bagwell
  • Robert W. Staiger

We explore in this paper the role of export subsidies when goods arriving from foreign countries are initially of unknown quality to domestic consumers, who learn about their quality only through consumption. If, when confronted with such goods, consumers view price as a signal of quality, a role for export subsidies can arise. In particular, we show that absent export subsidies, entry of high quality firms may be blocked by their inability to sell at prices reflecting their true quality. Export subsidies enable high quality producers to begin exporting profitably even while unable to credibly convey their high quality to consumers in the "introductory" period. Thus, in breaking the entry barrier for high quality firms, export subsidies can raise average quality in the market and a welfare-improving role for export subsidies emerges. Moreover, even when high quality firms find it possible to signal their high quality to consumers through an introductory pricing strategy, a role for government policy can arise: the signal (low introductory price) represents a transfer of surplus from foreign producers to domestic consumers which, as we show below, can be avoided with an appropriate export tax/subsidy policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2584.

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Date of creation: May 1988
Date of revision:
Publication status: published as Journal of International Economics, 1989.
Handle: RePEc:nbr:nberwo:2584
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  1. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
  2. Kyle Bagwell, 1986. "Informational Product Differentiation as a Barrier to Entry," Discussion Papers 711, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Feenstra, Robert C., 1986. "Trade policy with several goods and market linkages," Journal of International Economics, Elsevier, vol. 20(3-4), pages 249-267, May.
  4. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  6. Itoh, Motoshige & Kiyono, Kazuharu, 1987. "Welfare-Enhancing Export Subsidies," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 115-37, February.
  7. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  8. Grossman, Gene M & Horn, Henrik, 1988. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 767-87, November.
  9. Brecher, Richard A. & Feenstra, Robert C., 1983. "International trade and capital mobility between diversified economies," Journal of International Economics, Elsevier, vol. 14(3-4), pages 321-339, May.
  10. Kyle Bagwell & Michael Riordan, 1986. "Equilibrium Price Dynamics for an Experience Good," Discussion Papers 705, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  12. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  13. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
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