Rivalry in Uncertain Export Markets: Commitment versus Flexibility

Dermot Leahy and Gerda Dewit

No 2771, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Demand uncertainty; Strategic commitment; Flexibility; Trade policy (search for similar items in EconPapers)
JEL-codes: D80 F12 F13 (search for similar items in EconPapers)
Date: 2001-04
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Citations: View citations in EconPapers (1)

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Journal Article: Rivalry in uncertain export markets: commitment versus flexibility (2004)
Working Paper: Rivalry In Uncertain Export Markets: Commitment Versus Flexibility (2001)
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