Working Paper: CEPR ID: DP1968
Authors: J. Peter Neary; Dermot Leahy
Abstract: We characterize optimal trade and industrial policy in dynamic oligopolistic markets. If governments can commit to future policies, optimal first-period intervention should diverge from the profit-shifting benchmark to an extent which exactly offsets the strategic behaviour implied by Fudenberg and Tirole's 'fat cats and top dogs' taxonomy of business strategies. Without government commitment, there is an additional basis for intervention, whose sign depends on the strategic substitutability between future policy and current actions. We consider a variety of applications (to R&D spillovers, consumer switching costs, etc.) and extensions to second-best, revenue-constrained and entry-promotion policies.
Keywords: learning-by-doing; 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) | Optimal first-period intervention (H21) |
| Optimal first-period intervention (H21) | Counteract strategic behavior of firms (L13) |
| Lack of government commitment (H11) | Nature of intervention changes (O30) |
| Strategic substitutability between future policy and current actions (E61) | Effectiveness of policy interventions (F68) |
| Market characteristics (D49) | Government intervention strategies (L52) |