The role of export subsidies when product quality is unknown

Abstract

We explore the role of export subsidies when foreign goods are initially of unknown quality to domestic consumers. Absent export subsidies, entry of high quality firms may be blocked by their inability to sell at prices reflecting their true quality. Export subsidies can break this entry barrier and increase welfare. Moreover, even when high quality firms find it possible to signal their quality to consumers through an introductory pricing strategy, a rolefor government policy can arise: the signal (low introductory price) transfers surplus from foreign producers to domestic consumers and can be avoided with an appropriate export tax/subsidy policy.