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Free Entry, Quasi‐Free Trade, and Strategic Export Policy
Author(s) -
Schulman Craig T.
Publication year - 1997
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00041
Subject(s) - subsidy , economics , free trade , context (archaeology) , welfare , free entry , nash equilibrium , international economics , strategic complements , free riding , microeconomics , international trade , incentive , market economy , paleontology , biology
This paper analyzes governments’ choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four‐stage game, two types of equilibria emerge: a quasi‐free‐trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade.