Working Paper: CEPR ID: DP980
Authors: Dermot Leahy; J Peter Neary
Abstract: This paper examines the implications for strategic trade policy of different assumptions about precommitment. In a dynamic oligopoly game with learning by doing, the optimal first-period subsidy is lower if firms cannot precommit to future output than if they can; and is lower still if the government cannot precommit to future subsidies. In the linear case the optimal subsidy is increasing in the rate of learning with precommitment, but decreasing in it if the government cannot precommit. The infant-industry argument is thus reversed in the absence of precommitment, which has important implications for economic policy in dynamic environments.
Keywords: strategic trade policy; precommitment; learning by doing; infant-industry protection; time consistency
JEL Codes: F12; L13; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government precommitment (H11) | optimal subsidy (H21) |
| lack of government precommitment (H19) | optimal subsidy (H21) |
| learning rate (J24) | optimal subsidy (H21) |
| government precommitment (H11) | welfare outcomes (I38) |