Cost effectiveness of R&D and strategic trade policy

• Autores: Kujal Praveen, Juan Ruiz
• Localización: Documentos de trabajo - Banco de España, ISSN 0213-2710, Nº 1, 2007, págs. 9-50
• Idioma: inglés
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• Resumen

  • This paper analyzes the incentives for governments to impose export subsidies when firms invest in a cost saving technology before market competition. 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, 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.