Last One Out Wins: Trade Policy in an International Exit Game

57 Pages Posted: 17 Oct 2007 Last revised: 18 Sep 2010

See all articles by S. Lael Brainard

S. Lael Brainard

Deputy National Economic Advisor, The White House; National Bureau of Economic Research (NBER)

Date Written: December 1990

Abstract

This paper examines the effect of government intervention on the order and timing of firm exit in an international industry with fixed costs and declined demand. A dynamic inconsistency problem arises when the government is unable to precommit to a path of policy: it always intervenes to prolong the viability of the firm located in its market, even when the firm's survival is not the socially optimal outcome. The effect of tariff intervention is in all cases to terminate market operation prematurely, and in many cases to reverse the order of firm exit. Intervention in the absence of precommittment is never first best, and actually reduces welfare relative to the free market equilibrium when the differential between firms' fixed costs is large.

Suggested Citation

Brainard, S. Lael, Last One Out Wins: Trade Policy in an International Exit Game (December 1990). NBER Working Paper No. w3553. Available at SSRN: https://ssrn.com/abstract=471529

S. Lael Brainard (Contact Author)

Deputy National Economic Advisor, The White House ( email )

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