Strategic Investment and the Gains from Trade (N216-11)
Dewit, Gerda and Leahy , Dermot (2011) Strategic Investment and the Gains from Trade (N216-11). NUI Maynooth, NUI Maynooth.
This paper examines how trade liberalisation affects innovation, profits and welfare when firms are engaging in strategic R&D investment. We show that there are multiple equilibria including an autarky equilibrium for a range of high but non-prohibitive trade costs. At lower trade costs, only the trading equilibrium survives. Welfare is U-shaped in the trade costs, so a small fall in trade costs can be welfare reducing. However we find a threshold level of the effectiveness of investment above which trade is always welfare superior to autarky.
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