The Role Of Export Subsisies When Product Quality Is Unknown
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.
|Date of creation:||May 1988|
|Publication status:||published as Journal of International Economics, 1989.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kreps, David M & Wilson, Robert, 1982.
Econometric Society, vol. 50(4), pages 863-894, July.
- David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
- David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
- 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.
- 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.
- Gene M. Grossman & Henrik Horn, 1988. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 767-787.
- Gene M. Grossman & Henrik Horn, 1987. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," NBER Working Papers 2159, National Bureau of Economic Research, Inc.
- Bagwell, Kyle, 1990. "Informational product differentiation as a barrier to entry," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 207-223, June.
- 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.
- Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-365, June.
- Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Itoh, Motoshige & Kiyono, Kazuharu, 1987. "Welfare-Enhancing Export Subsidies," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 115-137, February.
- Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-826, September.
- Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
- Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier.
- James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
- Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
- James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
- Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
- 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.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2584. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.