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The role of commitment and the choice of trade policy instruments

Praveen Kujal and Celia Cabral ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The incentives for governments to impose subsidies and tariffs on R&D and output is analyzed in a differentiated good industry where firms invest in a cost saving technology. When government commitment is credible, subsidies to R&D and output are positive both under Bertrand and Cournot competition. In the absence of government commitment the policy instrument is a tariff under Bertrand, and a subsidy under Cournot, competition. However, welfare under free trade is always greater than imposing a tariff unilaterally, or bilaterally, and hence non-committal under price competition is never an equilibrium. If a government has to choose either a subsidy on R&D (or on output) then, independent of price or quantity competition, it subsidies R&D for low levels of product substitutability and output for higherlevels of substitutability.

Keywords: Product; differentiation; Trade; policies; Commiment; Tariffs; Subsidies (search for similar items in EconPapers)
Date: 1999-10
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Citations: View citations in EconPapers (1)

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