Working Paper: CEPR ID: DP560
Authors: J. Peter Neary
Abstract: This paper examines the optimality of export subsidies in oligopolistic markets, when home and foreign firms have different costs and there is an opportunity cost to public funds. Subsidies are found to be optimal only for surprisingly low values of the shadow price of government funds, and if subsidies are justified they should be higher the more cost-competitive are domestic firms. These results hold under both Cournot competition and Bertrand competition when firms move before governments. The results suggest that recent arguments for export subsidies apply only for firms that would be highly profitable even without subsidies.
Keywords: strategic trade policy; export subsidies; industrial policy; Cournot competition; Bertrand competition
JEL Codes: 422; 616
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shadow price of government funds (H19) | export subsidy (H20) |
| firm competitiveness (L21) | export subsidy (H20) |
| cost asymmetries (D61) | subsidy justification (H20) |
| timing of moves (C41) | optimal policy (C61) |