DP1199 International R&D Rivalry and Industrial Strategy without Government Commitment

Author(s): Dermot Leahy, J Peter Neary
Publication Date: June 1995
Keyword(s): Commitment, Dynamic Consistency, Export Subsidies, R&D Subsidies, Research and Development, Strategic Trade Policy
JEL(s): F12, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1199

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.