DP1549 Strategic Trade Policy When Firms Have Different Efficiency Levels

Author(s): Dermot Leahy, Catia Montagna
Publication Date: January 1997
Keyword(s): Export Subsidies, Heterogeneous Firms, Stategic 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=1549

In this paper we examine optimal strategic trade policy under oligopoly with many home and foreign firms when the firms have different levels of efficiency. The first-best policy involves a structure of firm-specific export subsidies and export taxes in which the government favours the most efficient firms unless the social cost of government funds is sufficiently high. When optimal policy is constrained to a uniform subsidy the optimal policy depends on the relative number of home and foreign firms and the curvature of demand. Deficiencies of the uniform subsidy are examined.