Revenue-Constrained Strategic Trade and Industrial Policy

The theory of strategic trade policy highlights differences in the commitment ability of firms and governments as a key motivation for intervention in oligopolistic markets. It has been extended to many periods, allowing consideration of industrial as well as trade policy, but only on the assumption that subsidies can be financed costlessly by non-distortionary taxation, so the marginal social cost of funds is unity. In this paper the theory of strategic trade and industrial policy is extended to allow for divergences between the social valuations of corporate profits and subsidy revenue foregone. The optimal revenue-constrained trade and industrial policy towards dynamic oligopolies is characterised, and it is proven that total net subsidy payments at the optimum are decreasing in the social cost of funds. The paper also examines the implications of the model for special cases where investment precedes either Cournot or Bertrand competition.

  • Authors: J Peter Neary and Dermot Leahy
  • Year: 2003
  • Organisation: University of Dublin
  • Publisher: CEPR
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