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Does a ‘non-committed’ government always generate lower social welfare than its ‘committed’ counterpart? Strategic trade policy when consumer surplus matters

Kresimir Zigic

Journal of Comparative Economics, 2011, vol. 39, issue 4, 533-556

Abstract: We show that social welfare in the setup where the government lacks the full ability to commit to its trade policies may exceed the social welfare when the government possesses full commitment power if consumer surplus is part of the social welfare function. This is never the case in the standard, “third market” framework of strategic trade policy. We provide two examples in which consumer surplus matters: the “home market” and the “intra-industry trade” setup. The policy instruments under consideration are import tariffs and export subsidies and there are R&D spillovers from the domestic to the foreign firm.

Keywords: Government commitment; Social welfare; Optimal tariffs and export subsidies; R&D spillovers (search for similar items in EconPapers)
JEL-codes: F13 L11 L13 O31 (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:eee:jcecon:v:39:y:2011:i:4:p:533-556