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Strategic Trade Policy with Unionized Firms: When Activism is the Efficient Choice

Strategic Trade Policy with Unionized Firms: When Activism is the Efficient Choice This paper revisits the issue (dating back to the Brander and Spencer’s approach, 1985) of the well-known inefficiency of the activist regime where Governments set subsidies for their own exporter firms. It is shown that such policies may be efficient (i.e., national social welfares are higher than under free trade) when firms are unionized under the usual Right-to-Manage arrangement and the product is sufficiently differentiated. That is, the emerging Nash equilibrium regime implies a subsidy policy which is Pareto-efficient, removing the unpleasant Prisoner’s Dilemma structure of the standard Brander and Spencer’s result. As an alternative interpretation this result suggests that, in such cases, it is always convenient the unilateral public intervention because welfares will be superior to those under free trade, also in the case of “retaliation” by the rival Government. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of International Commerce, Economics and Policy World Scientific Publishing Company

Strategic Trade Policy with Unionized Firms: When Activism is the Efficient Choice

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Publisher
World Scientific Publishing Company
ISSN
1793-9933
eISSN
1793-9941
DOI
10.1142/S1793993321500046
Publisher site
See Article on Publisher Site

Abstract

This paper revisits the issue (dating back to the Brander and Spencer’s approach, 1985) of the well-known inefficiency of the activist regime where Governments set subsidies for their own exporter firms. It is shown that such policies may be efficient (i.e., national social welfares are higher than under free trade) when firms are unionized under the usual Right-to-Manage arrangement and the product is sufficiently differentiated. That is, the emerging Nash equilibrium regime implies a subsidy policy which is Pareto-efficient, removing the unpleasant Prisoner’s Dilemma structure of the standard Brander and Spencer’s result. As an alternative interpretation this result suggests that, in such cases, it is always convenient the unilateral public intervention because welfares will be superior to those under free trade, also in the case of “retaliation” by the rival Government.

Journal

Journal of International Commerce, Economics and PolicyWorld Scientific Publishing Company

Published: Feb 24, 2021

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