Publication: Cost effectiveness of R&D and the robustness of strategic trade policy
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2003-01
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Export
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 and D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition, export subsidies are positive whenever R and D is sufficiently costeffective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R and D is sufficiently cost-effective. Output subsidies are more robust than implied by the recent literature.