Should Governments Help Winners or Losers?

Abstract

One central result in the strategic trade literature is that governments should not support domestic ”losers” but domestic ”winners”. We show that when first-mover advantages are taken into account, the reverse holds, governments have stronger incentives to support domestic ”losers” that face foreign ”winners”. Accordingly, governments can play Stackelberg against foreign Stackelberg leaders to prevent them from playing Stackelberg against domestic Stackelberg followers.