Last One Out Wins: Trade Policy in an International Exit Game

S Lael Brainard

International Economic Review, 1994, vol. 35, issue 1, 151-72

Abstract: This paper examines the effect of intervention on the order and timing of exit in an international industry with fixed costs and declining demand. A dynamic inconsistency problem arises when policymakers are unable to precommit: they always intervene to prolong the life of the local firm even when this is not socially optimal. The effect of tariff intervention is in all cases to terminate production prematurely and in many cases to reverse the order of exit. Intervention in the absence of recommitment is never first best and actually reduces welfare when the differential between firms' fixed costs is large. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1994
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