Multilateral Subsidy Games

Leahy, Dermot; Neary, J. Peter

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Multilateral Subsidy Games

CEPR Discussion Paper No. DP6479

29 Pages Posted: 30 May 2008

See all articles by Dermot Leahy

Dermot Leahy

National University of Ireland - University College Dublin; Centre for Economic Policy Research (CEPR)

J. Peter Neary

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 2007

Abstract

This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are "friendly", raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.

Keywords: Industrial policy, Investment subsidies, Oligopoly, R&D spillovers, Strategic trade policy, Subsidy wars

JEL Classification: F12, L13

Suggested Citation: Suggested Citation

Leahy, Dermot and Neary, J. Peter, Multilateral Subsidy Games (September 2007). CEPR Discussion Paper No. DP6479, Available at SSRN: https://ssrn.com/abstract=1138592