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Policy Synchronization and Staggering in a Dynamic Model of Strategic Trade

  • Praveen Kujal

    (Universidad Carlos III de Madrid)

  • Juan Ruiz

    (Universidad Carlos III de Madrid)

This paper studies steady-state, Markov-Perfect strategic trade policy when (infinitely lived) governments are committed to trade policy during two periods. We compare the case in which both governments choose their export subsidies in the same periods (synchronization) versus the case in which they set them in alternate periods (staggering). We find that, under Cournot competition, welfare is higher when both governments synchronize their choice of export-promoting policy, since export subsidies are lower (closer to the cooperative solution) than when governments set them sequentially. Retaliation is therefore stronger and more harmful when governments alternate as (temporary) Stackelberg leaders. Synchronization is the equilibrium of the pre-commitment game in which both governments choose when to set their export subsidies. These results are robust to having stochastic length of commitment period and to allowing predetermined but flexible choice of subsidies by both governments. We also analyze the results of policy-staggering under alternative modes of competition and the possibility of firms investing in R&D.

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File URL: http://econwpa.repec.org/eps/it/papers/0302/0302003.pdf
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Paper provided by EconWPA in its series International Trade with number 0302003.

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Length: 36 pages
Date of creation: 04 Feb 2003
Date of revision:
Handle: RePEc:wpa:wuwpit:0302003
Note: Type of Document - pdf file; prepared on Scientific Workplace; to print on any printer; pages: 36 ; figures: included in text
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Leahy, Dermot & Neary, J Peter, 1996. "International R&D Rivalry and Industrial Strategy without Government Commitment," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 322-38, October.
  2. Cheng, Leonard K, 1987. "Optimal Trade and Technology Policies: Dynamic Linkages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 757-76, October.
  3. Dockner, Engelbert J. & Haug, Alfred A., 1990. "Tariffs and quotas under dynamic duopolistic competition," Journal of International Economics, Elsevier, vol. 29(1-2), pages 147-159, August.
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  5. 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.
  6. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
  7. Davidson, Carl, 1984. "Cartel stability and tariff policy," Journal of International Economics, Elsevier, vol. 17(3-4), pages 219-237, November.
  8. Bhaskar, V. & Vega-Redondo, Fernando, 2002. "Asynchronous Choice and Markov Equilibria," Journal of Economic Theory, Elsevier, vol. 103(2), pages 334-350, April.
  9. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November.
  10. Kujal, Praveen & Ruiz, Juan, 2003. "Cost effectiveness of R&D and the robustness of strategic trade policy," UC3M Working papers. Economics we030401, Universidad Carlos III de Madrid. Departamento de Economía.
  11. Tanaka, Yasuhito, 1994. "Export subsidies under dynamic duopoly," European Economic Review, Elsevier, vol. 38(5), pages 1139-1151, May.
  12. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
  13. Castro, Sofia & Brandao, Antonio, 2000. "Existence of a Markov perfect equilibrium in a third market model," Economics Letters, Elsevier, vol. 66(3), pages 297-301, March.
  14. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-69, May.
  15. Jun, Byoung & Vives, Xavier, 2001. "Incentives in Dynamic Duopoly," CEPR Discussion Papers 2899, C.E.P.R. Discussion Papers.
  16. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  17. 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.
  18. Maskin, Eric & Tirole, Jean, 1987. "A theory of dynamic oligopoly, III : Cournot competition," European Economic Review, Elsevier, vol. 31(4), pages 947-968, June.
  19. Collie, David, 1993. "Profit-Shifting Export Subsidies and the Sustainability of Free Trade," Scottish Journal of Political Economy, Scottish Economic Society, vol. 40(4), pages 408-19, November.
  20. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
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  22. De Fraja, Giovanni, 1993. "Staggered vs. synchronised wage setting in oligopoly," European Economic Review, Elsevier, vol. 37(8), pages 1507-1522, December.
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