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Discussion Paper Details

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Title: Multilateral Subsidy Games

Author(s): Dermot Leahy and J Peter Neary

Publication Date: September 2007

Keyword(s): Industrial policy, Investment subsidies, Oligopoly, R&D spillovers, Strategic trade policy and Subsidy wars

Programme Area(s): International Trade and Regional Economics

Abstract: This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are "friendly", raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.

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Bibliographic Reference

Leahy, D and Neary, J. 2007. 'Multilateral Subsidy Games'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6479