Working Paper: CEPR ID: DP6479
Authors: Dermot Leahy; J. Peter Neary
Abstract: This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are "friendly", raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.
Keywords: industrial policy; investment subsidies; oligopoly; R&D spillovers; strategic trade policy; subsidy wars
JEL Codes: F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment levels (friendly) (F21) | rival profits (D33) |
| Investment levels (unfriendly) (F21) | rival profits (D33) |
| Investment subsidies (G31) | national welfare (I39) |
| Investment subsidies (G31) | welfare loss (D69) |
| Banning subsidies (H29) | national welfare (I39) |
| High spillovers (F69) | undersubsidization from global welfare perspective (D69) |
| Subsidy game (C72) | welfare superior to non-intervention (I38) |