Publication: The role of commitment and the choice of trade policy instruments
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1999-10
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Export
Abstract
The incentives for governments to impose subsidies and tariffs on R&D and output is analyzed in a differentiated good industry where firms invest in a cost saving technology. When government commitment is credible, subsidies to R&D and output are positive both under Bertrand and Cournot competition. In the absence of government commitment the policy instrument is a tariff under Bertrand, and a subsidy under Cournot, competition. However, welfare under free trade is always greater than imposing a tariff unilaterally, or bilaterally, and hence non-committal under price competition is never an equilibrium. If a government has to choose either a subsidy on R&D (or on output) then, independent of price or quantity competition, it subsidies R&D for low levels of product substitutability and output for higherlevels of substitutability.
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Keywords
Product differentiation, Trade policies, Commiment, Tariffs, Subsidies