Leahy, Dermot and Neary, J. Peter
Multilateral Subsidy Games. CEPR Discussion Paper No. 6479.
Centre for Economic Policy Research, London.
This paper examines the rationale for multilateral agreements to limit
investment subsidies. The welfare ranking of symmetric multilateral subsidy
games is shown to depend on whether or not investment levels are "friendly",
raising rival profits in total, and/or strategic complements, raising rival profits at
the margin. In both Cournot and Bertrand competition, when spillovers are low
and competition is intense (because goods are close substitutes), national welfare-
maximizing governments will over-subsidize investment, and banning
subsidies would improve welfare. When spillovers are high, national
governments under-subsidize from a global welfare perspective, but the
subsidy game is welfare superior to non-intervention.
||For helpful comments we are grateful to Arijit Mukherjee and to participants
in seminars at Prague and UCD, at the EEA Conference in Lausanne and at
the GEP Conference on "New Directions in International Trade Theory" at the
University of Nottingham, June 2007. Dermot Leahy acknowledges the
support of the Science Foundation Ireland Research Frontiers Programme
(Grant MAT 017).
||industrial policy; investment subsidies; oligopoly; R&D spillovers;
strategic trade policy; subsidy wars;
||Social Sciences > Economics
||06 Oct 2011 15:25
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