Cost-Effectiveness of R&D and the Robustness of Strategic Trade Policy
Universidad Carlos III de Madrid Working Paper No. 03-04
36 Pages Posted: 29 Apr 2003
Date Written: January 2003
Abstract
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.
Keywords: Product Differentiation, Strategic Trade Policy, Policy Reversals, R&D
JEL Classification: F12, F13, L13
Suggested Citation: Suggested Citation