Working Paper: NBER ID: w1464
Authors: James A. Brander; Barbara J. Spencer
Abstract: Countries often perceive themselves as being in competition with each other for profitable international markets. In such a world export subsidies can appear as attractive policy tools, from a national point of view, because they improve the relative position of a domestic firm in noncooperative rivalries with foreign firms, enabling it to expand its market share and earn greater profits. In effect, subsidies change the initial conditions of the game that firms play. The terms of trade move against the subsidizing country, but its welfare can increase because, under imperfect competition, price exceeds the marginal cost of exports. International noncooperative equilibriumis characterized by such subsidies on the part of exporting nations, even though they are jointly suboptimal.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in domestic export subsidies (F14) | Increase in domestic exports (F10) |
| Increase in domestic export subsidies (F14) | Decrease in output of foreign firms (F23) |
| Increase in domestic export subsidies (F14) | Increase in domestic welfare (net of subsidy) (H53) |