The Role of Export Subsisies When Product Quality is Unknown

37 Pages Posted: 16 Jul 2004 Last revised: 26 Jul 2010

See all articles by Kyle Bagwell

Kyle Bagwell

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Robert W. Staiger

Stanford University; University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 1988

Abstract

We explore in this paper the role of export subsidies when goods arriving from foreign countries are initially of unknown quality to domestic consumers, who learn about their quality only through consumption. If, when confronted with such goods, consumers view price as a signal of quality, a role for export subsidies can arise. In particular, we show that absent export subsidies, entry of high quality firms may be blocked by their inability to sell at prices reflecting their true quality. Export subsidies enable high quality producers to begin exporting profitably even while unable to credibly convey their high quality to consumers in the "introductory" period. Thus, in breaking the entry barrier for high quality firms, export subsidies can raise average quality in the market and a welfare-improving role for export subsidies emerges. Moreover, even when high quality firms find it possible to signal their high quality to consumers through an introductory pricing strategy, a role for government policy can arise: the signal (low introductory price) represents a transfer of surplus from foreign producers to domestic consumers which, as we show below, can be avoided with an appropriate export tax/subsidy policy.

Suggested Citation

Bagwell, Kyle and Staiger, Robert W., The Role of Export Subsisies When Product Quality is Unknown (May 1988). NBER Working Paper No. w2584, Available at SSRN: https://ssrn.com/abstract=428340

Kyle Bagwell (Contact Author)

Stanford University - Department of Economics ( email )

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Robert W. Staiger

Stanford University ( email )

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University of Wisconsin - Madison - Department of Economics ( email )

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