Discussion Paper Details

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Title: International R&D Rivalry and Industrial Strategy without Government Commitment

Author(s): Dermot Leahy and J Peter Neary

Publication Date: June 1995

Keyword(s): Commitment, Dynamic Consistency, Export Subsidies, R&D Subsidies, Research and Development and Strategic Trade Policy

Programme Area(s): International Trade and Regional Economics

Abstract: We examine optimal industrial and trade policies in a series of dynamic oligopoly games in which a home and a foreign firm compete in R&D and output. Alternative assumptions about the timing of moves and the ability of agents to commit intertemporally are considered. We show that the home export subsidy, R&D subsidy and welfare are higher in an equilibrium in which government commitment is credible than in the dynamically consistent equilibrium without commitment. Commitment yields gains but so does unanticipated reneging, whereas reneging which is anticipated by firms yields the lowest welfare of all.

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Bibliographic Reference

Leahy, D and Neary, J. 1995. 'International R&D Rivalry and Industrial Strategy without Government Commitment'. London, Centre for Economic Policy Research.