DP560 Cost Asymmetries in International Subsidy Games: Should Governments Help Winners or Losers?

Author(s): J Peter Neary
Publication Date: July 1991
Keyword(s): Cournot/Bertrand Competition, Export Subsidies, Industrial Policy, Strategic Trade Policy
JEL(s): 422, 616
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=560

This paper examines the optimality of export subsidies in oligopolistic markets, when home and foreign firms have different costs and there is an opportunity cost to public funds. Subsidies are found to be optimal only for surprisingly low values of the shadow price of government funds, and if subsidies are justified they should be higher the more cost-competitive are domestic firms. These results hold under both Cournot competition and Bertrand competition when firms move before governments. The results suggest that recent arguments for export subsidies apply only for firms that would be highly profitable even without subsidies.