Discussion paper

DP2771 Rivalry in Uncertain Export Markets: Commitment versus Flexibility

This Paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms? investment decisions. When the government can commit to an export subsidy, it may choose to over- or under-subsidize to deter private-sector capital commitment. When the government chooses its trade policy flexibly, the relative value of commitment to the unsubsidized foreign firm is greater than to the subsidized home firm. Finally, a flexible subsidy regime is compared to free trade.


Leahy, D and G Dewit (2001), ‘DP2771 Rivalry in Uncertain Export Markets: Commitment versus Flexibility‘, CEPR Discussion Paper No. 2771. CEPR Press, Paris & London. https://cepr.org/publications/dp2771