Discussion Paper Details

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Title: Robust Rules for Industrial Policy in Open Economies

Author(s): Dermot Leahy and J Peter Neary

Publication Date: March 2001

Keyword(s): Cost-Reducing Investment, Export Subsidies, Market-Expanding Investment, R&D Subsidies, Strategic Industrial Policy and Strategic Trade Policy

Programme Area(s): International Trade and Regional Economics

Abstract: The theory of strategic trade policy yields ambiguous recommendations for assistance to exporting firms in oligopolistic industries. Some writers have, however, suggested that investment subsidies are a more robust recommendation than export subsidies. We show that, though ambiguous in principle, the case for investment subsidies is reasonably robust in practice. Except when functional forms exhibit arbitrary non-linearities, it holds under both Cournot and Bertrand competition, with either cost-reducing or market-expanding investment, and with or without spillovers. Only if firms have strong asymmetries in their investment behaviour and engage in Bertrand competition is an investment tax clearly justified.

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Bibliographic Reference

Leahy, D and Neary, J. 2001. 'Robust Rules for Industrial Policy in Open Economies'. London, Centre for Economic Policy Research.