Working Paper: CEPR ID: DP1549
Authors: Dermot Leahy; Catia Montagna
Abstract: In this paper we examine optimal strategic trade policy under oligopoly with many home and foreign firms when the firms have different levels of efficiency. The first-best policy involves a structure of firm-specific export subsidies and export taxes in which the government favours the most efficient firms unless the social cost of government funds is sufficiently high. When optimal policy is constrained to a uniform subsidy the optimal policy depends on the relative number of home and foreign firms and the curvature of demand. Deficiencies of the uniform subsidy are examined.
Keywords: strategic trade policy; export subsidies; heterogeneous firms
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 policy (subsidies/taxes) (H29) | firm performance (efficiency) (L25) |
| uniform subsidy (H29) | reallocation of market shares favoring less efficient firms (L19) |
| optimal policy (C61) | subsidize the lowest cost firm (L11) |
| higher efficiencies (D61) | higher export subsidies (F14) |