Cost Effectiveness of R&D and Strategic Trade Policy

Praveen Kujal and Juan Ruiz

The B.E. Journal of Economic Analysis & Policy, 2007, vol. 7, issue 1, 35

Abstract: We analyze how the cost-effectiveness of R&D influences the incentives for governments to impose export subsidies. Governments first impose an export subsidy, or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition and for linear demands and constant marginal costs, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Thus, output subsidies seem more robust than implied by the recent literature.

Keywords: product differentiation; strategic trade policy; policy reversals; R&D (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (6)

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DOI: 10.2202/1935-1682.1502

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