Working Paper: NBER ID: w2584
Authors: Kyle Bagwell; Robert W. Staiger
Abstract: We explore in this paper the role of export subsidies when goods arriving from foreign countries are initially of unknown quality to domestic consumers, who learn about their quality only through consumption. If, when confronted with such goods, consumers view price as a signal of quality, a role for export subsidies can arise. In particular, we show that absent export subsidies, entry of high quality firms may be blocked by their inability to sell at prices reflecting their true quality. Export subsidies enable high quality producers to begin exporting profitably even while unable to credibly convey their high quality to consumers in the "introductory" period. Thus, in breaking the entry barrier for high quality firms, export subsidies can raise average quality in the market and a welfare-improving role for export subsidies emerges. Moreover, even when high quality firms find it possible to signal their high quality to consumers through an introductory pricing strategy, a role for government policy can arise: the signal (low introductory price) represents a transfer of surplus from foreign producers to domestic consumers which, as we show below, can be avoided with an appropriate export tax/subsidy policy.
Keywords: export subsidies; product quality; international trade; consumer information
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| export subsidies (H20) | entry of high-quality firms (L15) |
| export subsidies (H20) | average market quality (L15) |
| foreign government subsidy decisions (F23) | market participation by high-quality firms (L15) |
| export subsidies (H20) | transfer of surplus to domestic consumers (F16) |