Cost Effectiveness of R&D and the Robustness of Strategic Trade Policy
This paper analyzes the incentives for governments to impose export subsidies when firms invest in a cost saving technology before market competition. Governments first impose an export subsidy or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs,and negative otherwise.The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Output subsidies are more robust than implied by the recent literature.
|Date of creation:||04 Feb 2003|
|Date of revision:||04 Feb 2003|
|Note:||Type of Document - pdf file; prepared on Scientific Workplace; to print on Any; pages: 36 ; figures: included in text|
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