Working Paper: NBER ID: w1192
Authors: Barbara J. Spencer; James A. Brander
Abstract: This paper presents a theory of government intervention which provides an explanation for "industrial strategy" policies such as R&D or export subsidies in imperfectly competitive international markets. Each producing country has an incentive to try to capture a greater share of rent-earning industries using subsidies, but the subsidy-ridden international equilibrium is jointly suboptimal. The equilibrium in the strategic game involving firms and governments is modelled as a three stage subgame perfect Nash equilibrium. The assumption that the government is the first player in this game allows it to influence equilibrium industry outcomes by altering the set of credible actions open to firms.
Keywords: R&D; industrial strategy; government intervention; subsidies; Nash equilibrium
JEL Codes: F12; F13; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic R&D subsidy (O38) | Domestic R&D levels (O32) |
| Domestic R&D subsidy (O38) | Foreign R&D levels (O39) |
| Domestic R&D levels (O32) | Domestic firm's share of international market (F23) |
| Domestic firm's share of international market (F23) | Domestic firm's profits net of subsidy (F23) |
| Government subsidies (H23) | Domestic welfare (I38) |
| Both governments subsidizing R&D (O38) | Inefficiently high levels of R&D (O32) |
| Export subsidies (H23) | Domestic firm's competitive position in international market (F23) |