Rivalry in Uncertain Export Markets: Commitment versus Flexibility
University of Glasgow - Department of Economics
National University of Ireland - University College Dublin; Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 2771
This Paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms? investment decisions. When the government can commit to an export subsidy, it may choose to over- or under-subsidize to deter private-sector capital commitment. When the government chooses its trade policy flexibly, the relative value of commitment to the unsubsidized foreign firm is greater than to the subsidized home firm. Finally, a flexible subsidy regime is compared to free trade.
Number of Pages in PDF File: 38
Keywords: Demand uncertainty, flexibility, strategic commitment, trade policy
JEL Classification: D80, F12, F13working papers series
Date posted: May 1, 2001
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.937 seconds