Optimal export subsidy when demand is uncertain

Abstract

A standard result in export subsidy/tax game models is that if governments can credibly precommit themselves to a particular trade policy, an export subsidy (tax) is optimal when firms engage in quantity (price, respectively) competition ( Brander and Spencer, 1985 Eaton and Grossman, 1986). In this paper, we consider a model of dynamic duopoly when demand in the importing country is uncertain. We show that in a symmetric equilibrium a subsidy is generally optimal for price competition.