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Multilateral Subsidy Games

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  • Peter Neary
  • Dermot Leahy

Abstract

This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are friendly, raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.

Suggested Citation

  • Peter Neary & Dermot Leahy, 2007. "Multilateral Subsidy Games," Economics Series Working Papers 346, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:346
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    References listed on IDEAS

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    Cited by:

    1. Hattori, Masahiko & Tanaka, Yasuhito, 2016. "License or entry in oligopoly," MPRA Paper 73547, University Library of Munich, Germany.
    2. Jinji, Naoto, 2014. "Comparative statics for oligopoly: A generalized result," Economics Letters, Elsevier, vol. 124(1), pages 79-82.
    3. Mario Mariniello, 2013. "Should Variable Cost Aid to Attract Foreign Direct Investment be Banned? A European Perspective," Journal of Industry, Competition and Trade, Springer, vol. 13(2), pages 273-308, June.
    4. Koh, Yumi & Lee, Gea M., 2023. "R&D subsidies in permissive and restrictive environment: Evidence from Korea," Research Policy, Elsevier, vol. 52(1).
    5. Ya-Chin Wang, 2016. "R&D Policy Involving Consumer-Friendly Strategy: Cooperative and Non-Cooperative R&D," Journal of Industry, Competition and Trade, Springer, vol. 16(2), pages 257-272, June.
    6. Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2009. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," Working Paper Series 807, Research Institute of Industrial Economics, revised 23 Jul 2013.
    7. Armando Garcia Pires, 2012. "International trade and competitiveness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 727-763, August.
    8. Winston W. Chang & Tai‐Liang Chen, 2022. "Multi‐tier pricing in uniform and non‐uniform tax/subsidy systems," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 486-508, December.
    9. Emmanuelle Auriol & Sara Biancini, 2015. "Powering Up Developing Countries through Integration?," The World Bank Economic Review, World Bank Group, vol. 29(1), pages 1-40.
    10. Norbäck, Pehr-Johan & Persson, Lars & Douhan, Robin, 2014. "Entrepreneurship policy and globalization," Journal of Development Economics, Elsevier, vol. 110(C), pages 22-38.
    11. J. Peter Neary, 2010. "Two and a Half Theories of Trade†," The World Economy, Wiley Blackwell, vol. 33(1), pages 1-19, January.
    12. Dermot Leahy & J. Peter Neary, 2013. "Oligopoly and Trade," Palgrave Macmillan Books, in: Daniel Bernhofen & Rod Falvey & David Greenaway & Udo Kreickemeier (ed.), Palgrave Handbook of International Trade, chapter 7, pages 197-235, Palgrave Macmillan.
    13. Hoefele, Andreas, 2016. "Endogenous product differentiation and international R&D policy," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 335-346.
    14. Naoto Jinji & Tsuyoshi Toshimitsu, 2014. "Strategic Investment Subsidies under Asymmetric Oligopoly," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 490-501, August.
    15. Neary, Peter, 2009. "Two and a Half Theories of Trade," CEPR Discussion Papers 7600, C.E.P.R. Discussion Papers.
    16. Daniel Bernhofen & Raymond Riezman, 2009. "Introduction: ‘New directions in international trade theory’," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(1), pages 1-3, October.
    17. Pehr-Johan Norbäck, 2011. "Subsidizing Away Exports? A Note on R&D-policy Towards Multinational Firms," Journal of Industry, Competition and Trade, Springer, vol. 11(1), pages 25-42, March.
    18. Stephen Jui-Hsien Chou, 2013. "R&D Policy Competition with Process Innovation in a Multi-Product Duopoly," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 53-76, November.

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    More about this item

    Keywords

    Industrial Policy; Investment Subsidies; Subsidy Wars; Strategic Trade Policy; R&D Spillovers; Oligopoly;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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