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Cost Effectiveness of R&D and the Robustness of Strategic Trade Policy

  • Praveen Kujal

    (Universidad Carlos III de Madrid)

  • Juan Ruiz

    (Universidad Carlos III de Madrid)

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.

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File URL: http://128.118.178.162/eps/it/papers/0302/0302001.pdf
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Paper provided by EconWPA in its series International Trade with number 0302001.

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Length: 36 pages
Date of creation: 04 Feb 2003
Date of revision: 04 Feb 2003
Handle: RePEc:wpa:wuwpit:0302001
Note: Type of Document - pdf file; prepared on Scientific Workplace; to print on Any; pages: 36 ; figures: included in text
Contact details of provider: Web page: http://128.118.178.162

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  1. Robert W. Staiger & Kyle Bagwell, 1990. "The Sensitivity of Strategic and Corrective R&D Policy in Oligopolistic Industries," NBER Working Papers 3236, National Bureau of Economic Research, Inc.
  2. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  3. J. Peter Neary & Dermot Leahy, 1998. "Strategic trade and industrial policy towards dynamic oligopolies," LSE Research Online Documents on Economics 20246, London School of Economics and Political Science, LSE Library.
  4. Neary, J Peter, 1991. "Cost Asymmetries in International Subsidy Games: Should Governments Help Winners or Losers?," CEPR Discussion Papers 560, C.E.P.R. Discussion Papers.
  5. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  6. Juan Ruiz, 2004. "Cost effectiveness of R&D and the robustness of Strategic Trade Policy," Economics Discussion Papers 579, University of Essex, Department of Economics.
  7. 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.
  8. Dermot Leahy & J. Peter Neary, 2000. "Robust Rules for Industrial Policy in open Economies," Working Papers 200021, School Of Economics, University College Dublin.
  9. 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.
  10. Dermot Leahy & J. Peter Neary, 2001. "Robust rules for industrial policy open economies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 393-409.
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