DP1916 Beat 'Em or Join 'Em?: Export Subsidies Versus International Research Joint Ventures in Oligopolistic Markets
This paper compares adversarial with cooperative industrial and trade policies in a dynamic oligopoly game in which a home and foreign firm compete in R&D and output and, because of spillovers, each firm benefits from the other?s R&D. When the government can commit to an export subsidy, such a policy raises welfare relative to cooperation, except when R&D is highly effective and spillovers are near-complete. Without commitment, however, subsidization may yield welfare levels much lower than cooperation and lower even than free trade, though qualifications to the dangers from no commitment are noted.