Cost Effectiveness of R&D and Strategic Trade Policy

49 Pages Posted: 6 Feb 2007

See all articles by Praveen Kujal

Praveen Kujal

Charles III University of Madrid - Department of Economics

Juan M. Ruiz

Banco de España - Department of International Economics

Date Written: February 1, 2007

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. Thus, output subsidies seem 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

Kujal, Praveen and Ruiz Perez, Juan Manuel, Cost Effectiveness of R&D and Strategic Trade Policy (February 1, 2007). Banco de España Research Paper No. 0701, Available at SSRN: https://ssrn.com/abstract=960943 or http://dx.doi.org/10.2139/ssrn.960943

Praveen Kujal

Charles III University of Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91 6249651 (Phone)
+34-91 6249875 (Fax)

HOME PAGE: http://www.eco.uc3m.es/english/staff/contact_info/

Juan Manuel Ruiz Perez (Contact Author)

Banco de España - Department of International Economics ( email )

Alcala 48
28014 Madrid
Spain
+34 913384334 (Phone)
+34 913386212 (Fax)

HOME PAGE: http://www.eco.uc3m.es/~jruiz/

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