IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20260071.html

A Subsidization Dilemma: the Effect of Shadow Cost of Public Funds and Consumer Distribution

Author

Listed:
  • Jaap Roelen

    (University of Amsterdam)

  • Martijn Ketelaars

    (Tilburg University)

  • Peter Kort

    (Tilburg University)

Abstract

This article studies subsidy competition in a two-country-two-firm model incorporating bilateral trade, consumer distribution, and a shadow cost of public funds. Governments choose subsidies to maximize domestic or international welfare, with cooperation defined by subsidy choices maximizing international welfare. Under equal consumer bases, the subsidy game is a prisoner's dilemma if and only if the shadow cost is positive. This creates an opportunity for cooperation; without cooperation, however, governments oversubsidize their firms. We find that incentives to cooperate increase with the shadow cost. However, sufficiently unequal consumer distributions can eliminate the prisoner's dilemma, removing the larger country's incentive to cooperate.

Suggested Citation

  • Jaap Roelen & Martijn Ketelaars & Peter Kort, 2026. "A Subsidization Dilemma: the Effect of Shadow Cost of Public Funds and Consumer Distribution," Tinbergen Institute Discussion Papers 26-071/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20260071
    as

    Download full text from publisher

    File URL: https://papers.tinbergen.nl/26071.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20260071. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tinbergen Office +31 (0)10-4088900 (email available below). General contact details of provider: https://edirc.repec.org/data/tinbenl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.