Optimal trade,industrial, and privatization policies in a mixed duopoly with strategic managerial incentives

Abstract

This paper examines optimal trade, industrial, and privatization policies in a home-market model of mixed international duopoly with strategic managerial incentives. Under linear demand and constant marginal costs, the optimal degree of privatization is shown to depend crucially on cost and demand parameters and on the availability of strategic trade and industrial policies. If both firms are equally efficient, optimal trade and industrial policies drive out the foreign firm and the privatization policy loses its effect on national welfare; however, if the home firm is less efficient, then full privatization combined with an import tariff and a production subsidy is optimal for the home country, while an export subsidy is optimal for the foreign country. If trade and industrial policies are unavailable and if both firms are equally efficient, full state-ownership, which drives out the foreign firm, becomes optimal; however, if the home firm is less efficient, only partial privatization is optimal, The state-ownership share is increased if either the market size grows, the home firm's efficiency increases, or the foreign firm's efficiency decreases. Further, the paper demonstrates the potential conflict between privatization and trade liberalization policies.     

The Use and Abuse of Export Subsidies: Evidence from Colombia

(12033) Christian Helmers and Natalia Trofimenko We evaluate the impact of firm‐specific export subsidies on exports in Colombia. Using a two‐step selection model, we predict firm‐specific subsidy amounts that can be explained by the characteristics that determine firms’ eligibility for government support and its amount. Drawing on the accounts of the discretionary allocation of subsidies in developing countries, we interpret the discrepancy between the predicted and the observed subsidy amounts as a proxy for a firm's ties to government officials. Controlling for observable and unobservable firm characteristics as well as persistence in exporting, we find that although, in general, subsidies exhibit a positive impact on export volumes, this impact is diminishing in subsidy size and in the degree of a firm's connectedness.     

Distributive Policies and Economic Growth: An Optimal Taxation Approach

In an infinite‐horizon endogenous growth model a capital income cum investment subsidy tax is considered to investigate if distribution of income towards the non‐accumulated factor of production (labour) retards growth and if capital income taxes are bad instruments to finance investment subsidies. The paper identifies conditions under which the tax scheme is better for growth than other distorting tax schemes. In the model a pro‐labour government acts growth maximizing and distributing income towards labour raises growth. A pro‐capital government's preferred policy is not growth maximizing under the tax scheme, but may generate higher growth than its optimal policy under other tax schemes.     

IMPERFECT COMPETITION IN THE RECYCLING INDUSTRY

We study the market allocation in an economy where material is used for producing a consumption good, then recycled and finally landfilled, and where a recycling firm has market power. The material content constitutes an aspect of green product design and affects the recycling costs. Although the recycling firm's supply of recycling services is inefficiently low, it does not abuse its market power to distort the product design allocation. Different policy schemes are proposed which correct for market failures. One promising candidate is a relative recycling standard combined with a consumption good's tax, a material subsidy and a subsidy on recycling services.     

Preferences,Welfare and Desirable Subsidies under Monopolistic Competition

A simple model of monopolistic competition with consumer preferences for diversity reconciles an empirical‐theoretical disconnect of the welfare properties of industrial subsidies. The optimal policy rules indicate that subsidies can be Pareto improving, but subject to society's preference for diversity. More counter‐intuitively, the welfare‐maximizing subsidy is always found to be strictly non‐negative, and the general qualitative nature of the results seem to contradict the optimum taxation literature. The subsidy incidence is also examined and we find that there exists a potential for an over‐shifting of the subsidy.     

Strategic trade policy and union-firm bargaining agenda

In this paper, we revisit the issue of the scope of bargaining between duopolistic firms and unions in an open economy with strategic trade policy. It is shown that, in contrast with the case of the absence of export tax/subsidy, a right-to-manage (RTM) arrangement always emerges endogenously as a sub-game perfect Nash equilibrium in agreement between parties. Moreover, such an arrangement may be also Pareto-optimal in both exporting countries in the sense that profits, workers' welfare (provided that union's power is sufficiently high) and social welfare as a whole are higher than the efficient bargaining (EB) arrangement. Moreover, since the government of the country in which there is EB (while in the other country the alternative agenda RTM is used) levies a tax on export, then the conventional result that under quantity competition it is always optimal for exporting countries to subsidise exports may be reversed.     

Strategic Trade Policy through the Tax System

If conventional instruments of strategic trade policy are unavailable, the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments. In this paper, I consider a model where firms from two countries compete with each other on a market in a third country. Both firms have affiliates in the third country where (part of) the production takes place. I analyse optimal policy choices of the firms' residence countries aiming at strategically manipulating the competitiveness of their firms. I show that, first, countries prefer the tax exemption system over the tax credit system if there is no intra‐firm trade. Second, if the headquarters provide inputs for production in the affiliate, countries prefer the tax exemption system if the transfer price for these inputs is close to the headquarters' variable cost and if the residence country's tax rate is high. However, if transfer prices are high and the residence country's tax rate is low, I show that the tax credit system is an optimal tax policy choice for both countries. From a policy perspective, the view that the tax exemption system is generally the best policy response if domestic firms' competitiveness is a policy goal has to be qualified.     

中国服务贸易补贴现状及绩效研究

中国服务贸易正处于高速发展阶段,也遇到了诸多问题,如长期贸易逆差和结构性失调。服务贸易补贴作为政府宏观调控的手段,已经成为全球普遍用来促进服务贸易发展、提高服务贸易竞争力的方式。但目前对服务贸易补贴的研究大部分还不够深入,国际组织对服务贸易和补贴的定义也存在分歧。本文首先对中国的服务贸易概况、服务贸易补贴政策环境与情况进行梳理,然后通过宏观和微观数据对中国服务贸易补贴的效果进行描述性评估,构建面板数据计量模型进行统计评估,最终指出中国服务贸易补贴存在体制不完善、方式较单一、效果不显著等问题,并提出需在世贸组织规则框架下,建立有效的补贴政策、完善立法并丰富补贴方式的建议。     

TAX,STIMULI OF INVESTMENT AND FIRM VALUE

Pennings (2000 , European Economic Review, 44, pp. 383–91) has shown that the government can speed up investment by subsidizing the potential investing firm's entry cost while taxing the future proceeds from the investment, so as to render the net expected value of its subsidy program zero. This note argues that while speeding up investment, this subsidy‐tax program also lowers the value of the firm and therefore will be rejected by it.     

A reappraisal of strategic trade policies with the endogenous mode of competition under vertical structures

This paper examines the endogenous choice of competition mode with strategic export policies in vertically related markets when each upstream firm located in each country determines the terms of the two-part tariff contract by maximizing generalized Nash bargaining. We show that (i) choosing Cournot (Bertrand) competition is the dominant strategy for both downstream firms when goods are substitutes (complements), which leads Pareto superior regardless of the nature of goods under the optimal trade policies; (ii) irrespective of rival’s competition mode, the optimal trade policy is an export subsidy under Cournot competition and an export tax under Bertrand competition; and (iii) trade liberalization may give rise to changes of competition mode and increase of social welfare.     

Internationalisation, industrial policy and clusters

This paper analyses industrial policy in an open economy hosting an agglomeration consisting of vertically linked upstream and downstream firms. We show that optimal policy towards upstream and downstream industries may typically differ radically in this setting as compared to the case of a closed economy. Internationalisation in terms of international mobility of firms as well as reduced trade costs is found to have significant impact on policy design. We find that in addition to technology and demand characteristics, degree of mobility and level of trade cost are key determinants of tax and subsidy levels.     

Trade policy under firm-level heterogeneity in a small economy

We explore the effect of trade policy on productivity and welfare in the now standard model of firm-level heterogeneity and product differentiation with monopolistic competition. To obtain sharp results, we restrict attention to an economy that takes as given the price of imports and the demand schedules for its exports (a “small economy”). We first establish that welfare can be decomposed into four terms: productivity, terms of trade, variety and curvature, where the last is a term that captures heterogeneity across varieties. We then show how a consumption subsidy, an export tax, or an import tariff allows our small economy to deal with two distortions that we identify and thereby reach its first-best allocation. We also show that an export subsidy generates an increase in productivity, but given the negative joint effect on the other three terms (terms of trade, variety, and curvature), welfare falls. In contrast, an import tariff improves welfare in spite of the fact that productivity falls.     

Durable Goods Monopoly,Buyer Uncertainty,and Concurrent Selling and Renting

Stylized durable goods monopoly models typically conclude that monopolists prefer to rent their output due to commitment problems associated with sales. However, we commonly observe monopolistic firms in durable goods industries simultaneously selling and renting output. To address this apparent discrepancy a simple two‐period asymmetric information model is constructed where buyers are uncertain of the good's durability and the firm's manufacturing costs. This is a natural asymmetric information specification since the firm typically has more precise knowledge of product durability and production costs than buyers do. The analysis indicates that a monopolist may wish to concurrently sell and rent output when buyers do not have perfect knowledge. If, for example, consumers believe that product durability and manufacturing costs are higher than they truly are, the firm may wish to simultaneously sell and rent output. Thus buyers' expectations about firm costs and product durability are of critical importance in durable goods models, particularly in terms of explaining concurrent rentals and sales.     

Strategic Trade Policies Under Monopsony and Uncertainty: The Exporter’s Non-Linear Responses Based on the Organization of Its Industry

Players’ access to information, their market power, and the timing and rationale of their decisions are important but often neglected in the making of strategic trade policies. I examine optimal decisions in a monopsonistic market with asymmetric information to determine an exporting country’s policy strategies. The large importing country first sets a producer subsidy and later imposes an import tariff after learning about the welfare-maximizing exporter’s reactions to the subsidy. I assume that at the time of their decisions, the n exporting firms have incomplete information and rely only on noisy signals from their own domestic market to account for the uncertainty in the international market. I find that import tariff and producer subsidy can be substitute rather than exclusively independent policies. Results also show that the exporting country’s optimal reaction is non-linear and is based on the structure of its export industry; the exporting country’s government facing a large importer subsidizes (or taxes) its export when the number of exporting firms is low (or high) relative to a threshold number of firms. More important, before giving out subsidies, the exporting country’s government requires more collusion of its firms especially when the large importer targets a fixed domestic price.     

Firm-level export duration: The importance of market-specific ownership linkages

This paper explores the impact of a firm's market-specific ownership linkages and trade complementarities on different dimensions of its exporting longevity. Unlike previous studies that were mostly based on country-product-level data, this paper uses transaction-level trade data on the population of firms in Slovenia in the 2002–11 period, matched with detailed origin/direction of inward/outward FDI information to determine a firm's integration in international production networks. Our results indicate that firm's bilateral inward and outward FDI flows with an export-destination country have a strong positive effect on a firm's export survival in that market. Importance of market-specific ownership linkages for export duration is exclusively driven by intermediate goods which suggests prolonged export duration through production network involvement. However, the perseverance effect of bilateral FDI ties on export spells has been weakened during the crisis period. We find pronounced market- and product-related trade complementarities as either exporting or importing experience with the relevant market/product substantially improves the chances of a product–market export spell continuing. Finally, the risk of exports termination is lower for a firm's core export products.     

Subcontracting bargaining power and the trade policy

In this paper, we consider that the split of surplus from a subcontracting deal depends on the relative bargaining powers of domestic and foreign firms. The finding shows that a domestic optimal export policy is a tax (subsidy) if the bargaining power of the domestic firm is sufficiently small (large). We also demonstrate that a domestic firm’s higher bargaining power increases (may decrease) domestic profit if the export policy is exogenous (endogenous). In the presence of an outsider option, the domestic optimal export policy will be threatened by the outsider option if the domestic firm’s bargaining power is sufficiently small, and thus a large bargaining power increases the optimal export tax. At the same time, the foreign firm may still subcontract to the domestic firm even if the domestic firm has a higher total marginal cost of the intermediate good than the outsider option.     

Trade patterns,unemployment and growth

This paper analyses the implications of a minimum wage in an open economy two-sector model where the effect of growth on trade and unemployment is explicitly determined. The first-best policy is a wage subsidy to all employment while the second-best policy is a production tax cum subsidy. In the absence of policy intervention it is shown that growth in the short run results in decreasing unemployment for the home country if it is specialized in consumption goods or incompletely specialized provided that the minimum wage is binding. If the economy is specialized in investment goods, then unemployment may increase initially but as growth continues the minimum wage no longer remains binding and full employment is restored. In the long run by examining the dynamic interaction between trade and growth it is possible for the economy to be incompletely specialized with unemployment. If the economy specializes in consumption goods, it is possible for the economy to attain full employment.     

Economic growth with demand saturation and “endogenous” demand creation

In this article, we present a model of economic growth through “demand creation” in the face of “demand saturation,” by representing demand saturation by an S‐shaped logistic function and reckoning the firm's R&D as an activity to determine the probability of product innovation, that is, of demand creation. By defining the parameter of birth rate of a new product as the probability that a new product is derived from an existing one and identifying the time path of this parameter with the firm's R&D plan, we derive the optimal R&D plan and examine the growth rate of the firm's expected total revenue along this optimal plan. We then find that the optimal birth rate of a new product is influenced positively by the speed of diffusion of demand and the initial level of demand but negatively by the unit cost of production and the interest rate and that the growth rate of the firm converges to the optimal birth rate of a new product.     

Strategic trade policy with endogenous choice of quality and asymmetric costs

This paper examines strategic trade and joint welfare maximizing incentives towards investment in the quality of exports by an LDC and a developed country. Firms first compete in qualities and then export to an imperfectly competitive, third country market. Under Bertrand competition, unilateral policy involves an investment subsidy by the low-quality LDC and an investment tax by the developed country, whereas jointly optimal policy calls for the reverse so as to reduce price competition by increasing product differentiation. Under Cournot competition, unilateral policy is also reversed from the Bertrand outcome, but jointly optimal policy involves a tax in both countries.     

WTO subsidy rules and tariff liberalization: evidence from accession of China

Countries increasingly rely on subsidies to assist their producers leading to concerns about their potential misuse. The WTO regulates its members’ subsidies by defining subsidies that are permissible, as well as by providing means to retaliate against subsidies of partner countries if these subsidies hurt one's interest. However, these subsidy rules might have an unintended effect. As both subsidies and tariffs are substitute instruments of protection, tighter subsidy rules might lead to a decrease in the pace of tariff liberalization. In this paper, we present first empirical evidence in support of this prediction. Using China's accession to the WTO in 2001 as a case study, we show that China's accession to the WTO was associated with a relative increase in its tariffs for products that faced a higher threat of retaliation against subsidies. More importantly, we also show that increases in tariff were larger in products with higher potential costs imposed by retaliation. Finally, we include several robustness tests as well as conduct two counterfactual exercises to verify that the results we obtain are indeed due to perceived threat of retaliation against subsidies.