Market concentration and superiority among strategic export subsidy policies with taxation distortion and cost heterogeneity

Abstract

AbstractThis paper is the first attempt to investigate the ranking of the market concentration rate (Herfindahl–Hirschman index) under specific, demand, and cost ad valorem subsidies. We show that the cost ad valorem subsidy raises the variance of the distribution of effective marginal cost, thus increasing the allocative production efficiency and yielding the highest Herfindahl–Hirschman index. In addition, we find that the distortionary cost of subsidy and the cost heterogeneity of the domestic firms play an important role in determining the superiority of social welfare under three subsidy policies. Finally, of the three subsidy regimes, the total profit of the domestic firms under the cost ad valorem subsidy is the greatest. Our finding has altered the traditional wisdom on the choice of strategic trade policies.