Optimal degree of interagency coordination of subsidy and tariff policies

Abstract

A government consists of agencies (departments), each of which tends to pursue its own self-interest. To seek its ultimate goal (public interest), for example, welfare maximization, the government is obliged to coordinate its agencies. We aim to investigate the optimal degree of interagency coordination of subsidy and tariff policies. We assume that the government consists of a subsidy agency, tariff agency, and coordination agency. To investigate this, we construct the following multi-stage game: (1) The coordination agency presents an objective function that reflects the maximization of the ultimate goal to both the subsidy and tariff agencies. (2) Both of these agencies set their levels to maximize the objective. (3) Given their levels, both a domestic firm and foreign firm compete in the domestic market in a Cournot fashion. We establish that no coordination is desirable for both benevolent and consumer-oriented governments, and partial coordination is desirable for a Leviathan (producer-oriented government) when the cost disadvantage of the domestic firm is (not) small.