A BEJEAP Topics article.

Abstract

We analyze how the cost-effectiveness of R&D influences the incentives for governments to impose export subsidies. Governments first impose an export subsidy, or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition and for linear demands and constant marginal costs, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Thus, output subsidies seem more robust than implied by the recent literature.

Submitted: September 21, 2005 · Accepted: December 4, 2006 · Published: April 16, 2007

Recommended Citation

Kujal, Praveen and Ruiz, Juan M. (2007) "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy: Vol. 7 : Iss. 1 (Topics), Article 21.
Available at: http://www.bepress.com/bejeap/vol7/iss1/art21