Working Paper: CEPR ID: DP1199
Authors: Dermot Leahy; J. Peter Neary
Abstract: We examine optimal industrial and trade policies in a series of dynamic oligopoly games in which a home and a foreign firm compete in R&D and output. Alternative assumptions about the timing of moves and the ability of agents to commit intertemporally are considered. We show that the home export subsidy, R&D subsidy and welfare are higher in an equilibrium in which government commitment is credible than in the dynamically consistent equilibrium without commitment. Commitment yields gains but so does unanticipated reneging, whereas reneging which is anticipated by firms yields the lowest welfare of all.
Keywords: Research and Development; R&D subsidies; Strategic trade policy; Export subsidies; Commitment; Dynamic consistency
JEL Codes: F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government commitment (H11) | Domestic welfare (I38) |
| Full commitment equilibrium (FCE) (D51) | Domestic welfare (I38) |
| Government commitment to export subsidy (F10) | Domestic welfare (I38) |
| Unanticipated government reneging (H13) | Domestic welfare (I38) |
| Anticipated reneging (D84) | Domestic welfare (I38) |
| Higher export and R&D subsidies (F14) | Domestic welfare (I38) |