Optimal Export Policy for a New-Product Monopoly

Kyle Bagwell

American Economic Review, 1991, vol. 81, issue 5, 1156-69

Abstract: A new welfare-enhancing role is identified for a policy of export subsidization in a new-product industry. An export-subsidy policy promotes the (rational) perception that a high-quality export can be provided at a relatively low price. Thus, an export subsidy generates a first-order benefit to welfare by enabling a high-quality export to be sold at a less-distorted high price. The subsidy will also introduce distortions into the price of a low-quality export and the quality-selection process. Since these choices are initially undistorted, however, the export-country welfare loss arising from new distortions is of second-order importance. Copyright 1991 by American Economic Association.

Date: 1991
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