Working Paper: CEPR ID: DP1916
Authors: J. Peter Neary; Paul O'Sullivan
Abstract: This paper compares adversarial with cooperative industrial and trade policies in a dynamic oligopoly game in which a home and foreign firm compete in R&D and output and, because of spillovers, each firm benefits from the other?s R&D. When the government can commit to an export subsidy, such a policy raises welfare relative to cooperation, except when R&D is highly effective and spillovers are near-complete. Without commitment, however, subsidization may yield welfare levels much lower than cooperation and lower even than free trade, though qualifications to the dangers from no commitment are noted.
Keywords: Research and Development; R&D; spillovers; cooperative agreements; research joint ventures; RJVs; strategic trade policy; export subsidies; commitment; dynamic consistency
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government policies encouraging domestic firms to adopt adversarial strategies (L49) | Better welfare outcomes (I31) |
| R&D effectiveness and spillovers are low (O32) | Lower overall welfare (D69) |
| R&D is highly effective and spillovers are near-complete (O36) | Higher welfare than adversarial policies (D69) |
| Government commitment to export subsidies before R&D investment decisions (O38) | Higher welfare (I31) |
| Government cannot commit to subsidy levels in advance (H19) | Substantial welfare losses (D69) |
| Non-commitment (D79) | Welfare losses (D69) |