Working Paper: CEPR ID: DP1405
Authors: Konstantine Gatsios; Tryphon Kollintzas; Costas Lagopoulos
Abstract: In this paper we obtain the time-consistent solution to a stochastic dynamic version of the strategic export subsidy problem. The dynamic structure of the problem emanates either from an exhaustible resource or from a learning-by-doing technology. In any given period, nature ?chooses? the stochastic demand and cost parameters first. Then, governments choose subsidies. Lastly, firms choose output levels. We establish existence, uniqueness, and representation results for the time-consistent equilibrium of the game. Various interesting features of the solution are illustrated by simulation analysis. In particular, subsidies jump immediately to positive levels and, perhaps paradoxically, are reduced gradually to zero in the exhaustible resource case, while they keep rising in the learning-by-doing case. Subsidies are higher in the learning-by-doing case than when the good in question is an exhaustible resource. Also, they are higher in the case when only one government is active, and lower in the corresponding time-inconsistent equilibrium case.
Keywords: time-consistent equilibrium; strategic export subsidy; exhaustible resource; learning-by-doing
JEL Codes: C16; C73; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government subsidy decisions (H20) | firms' output levels (D21) |
| firms' output levels (D21) | market share (L17) |
| market share (L17) | profits (L21) |
| current subsidies (H23) | future outputs (C67) |
| exhaustible resource (Q31) | subsidy dynamics (H23) |
| learning-by-doing technology (O30) | subsidy levels (H23) |
| learning-by-doing case (C90) | higher subsidies (H23) |
| one government active (H11) | higher subsidies (H23) |