Strategic Trade Policy and Non-Linear Subsidy

Discussion Papers


by YOSHINO Hisao

March 2010


In a strategic trade policy, it is assumed, in this paper, that a government changes disbursement method so that the reaction function of home firm approaches infinitely close to that of foreign firm. If so, the government is able to reduce the subsidy, in some cases to negative values. The latter cases mean export tax. In the framework of Cournot-Nash equilibrium, Eaton and Grossman[1986] showed that export subsidy is preferable to export tax. In this paper, it is shown that export tax is preferable to export subsidy in some cases in the framework of Cournot-Nash equilibrium, considering the uncertainty in demand. Historically, many economists mentioned non-linear subsidy. However, optimum solution of it has not yet been shown. The optimum solution is shown in this paper.

Keywords: strategic trade policy, non-linear subsidy, Cournot-Nash equilibrium, Stackelberg equilibrium
JEL classification: F12, F13, L52

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