SHORT‐RUN POLICY COMMITMENT WHEN INVESTMENT TIMING IS ENDOGENOUS: ‘MORE HARM THAN GOOD?’

In our model, firms choose when to set cost‐reducing investment and the government, which only has short‐run commitment power, sets an output subsidy. We show that firms that delay investment without government intervention have an incentive to invest early under policy activism, strategically underinvesting or overinvesting to obtain larger subsidies. The policy scheme thus creates a new, potentially more harmful, distortion. Under oligopoly, a firm has a weaker incentive to manipulate policy than under monopoly, which makes policy intervention less harmful. We investigate when the government may do better by adhering to laissez‐faire than by engaging in active policy intervention.     

Should I stay or should I go? Foreign direct investment,employment protection and domestic anchorage

This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the “conventional wisdom” by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country’s ability to “anchor” potential outward investment. Based on our simple theoretical framework, we estimate an empirical model, using data on bilateral FDI and employment protection indices for OECD countries, and controlling for other labour market institutions and investment costs. We find that, while an “unfavourable” employment protection differential between a domestic and a foreign location is inimical to FDI, a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm’s home country makes firms reluctant to relocate abroad and keeps them “anchored” at home.     

Export Promotion Via Official Export Insurance

Proponents of free trade argue that export promotion distorts competition and undermines the multilateral trade system. In most countries export insurance is provided by the government and, consequently, is driven more by a broad range of policy objectives than purely insurance principles. This paper, however, shows that export promotion does not necessarily imply trade distortions and that most export destinations do not benefit from insurance premium subsidies. A significant policy implication of these findings is that the WTO and the EU are correct not to banish completely official export insurance.     

Strategic R&D Commitment and the Gains from Trade

This paper examines how trade liberalization affects innovation, profits and welfare in a model of reciprocal markets when firms pre‐commit to research and development (R&D). We establish that the equilibrium is not always unique and show that, with trade, R&D commitment leads to higher levels of innovation, lower profits, higher consumer surplus and higher welfare than when R&D is chosen simultaneously to output levels. Furthermore, if the effectiveness of R&D is sufficiently high, trade always yields higher welfare than autarky, implying that R&D commitment may significantly enhance the welfare gains from trade liberalization.     

Oligopsonistic Cats and Dogs

This paper examines strategic investment behaviour when firms have oligopsony power in the input market. Focusing on the labour market, we study how a firm’s labour supply augmenting investment affects the equilibrium when oligopsonistic firms set wages. Relative to a non-strategic benchmark, optimal investment strategies involve boosting investment that leads rival employers to cut wages, but involves cutting back on investment that causes the latter to increase their wages. Implications of existing labour market policies for strategic investment are also discussed. Finally, the model is generalised to nest wage and employment competition and is extended to include other types of investment.     

Rivalry in uncertain export markets: commitment versus flexibility

This paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms’ investment decisions. Firms’ investment timing is endogenous and can be manipulated by the home government, which sets a subsidy before firms decide when to invest. We show that when the government wishes to manipulate investment timing, it will choose its policy to deter investment commitment by the home or the foreign firm.