The role of commitment and the choice of trade policy instruments

Celia Cabral ()
Authors registered in the RePEc Author Service: Praveen Kujal

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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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:6166

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