Strategic trade policy: Choosing between export subsidies and export quotas under uncertainty

Abstract

I consider a trade policy game in which the choice of policy (subsidy or quota) and time of implementation [before (commit) or after (delay) observing the random demand intercept] is endogenously determined. Each country has four possible options: CQ, CS, DS and DQ, where CQ denotes a commitment to a quota and the other options are similarly labeled. For the special case of an international duopoly, countries prefer quotas to subsidies: CQ is chosen if noise is ‘small’ and DQ if noise is ‘large’. Also interesting is that quotas in the DQ regime coincide with firms' desired exports.