Robust Rules for Industrial Policy in Open Economies

29 Pages Posted: 12 Apr 2001

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: March 2001

Abstract

The theory of strategic trade policy yields ambiguous recommendations for assistance to exporting firms in oligopolistic industries. However, some writers have suggested that investment subsidies are a more robust recommendation than export subsidies. We show that, though ambiguous in principle, the case for investment subsidies is reasonably robust in practice. Except when functional forms exhibit arbitrary non-linearities, it holds under both Cournot and Bertrand competition, with either cost-reducing or market-expanding investment, and with or without spillovers. Only if firms have strong asymmetries in their investment behaviour and engage in Bertrand competition is an investment tax clearly justified.

Keywords: Cost-reducing investment, export subsidies, market-expanding investment, R&D subsidies, strategic industrial policy, strategic trade policy

JEL Classification: F12, L13

Suggested Citation

Leahy, Dermot and Neary, J. Peter, Robust Rules for Industrial Policy in Open Economies (March 2001). Available at SSRN: https://ssrn.com/abstract=266621

Dermot Leahy (Contact Author)

National University of Ireland - University College Dublin ( email )

Department of Economics
Belfield
Dublin 4
Ireland
+353 1 706 7620 (Phone)
+353 1 283 0068 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

J. Peter Neary

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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