Welfare Effects of Reducing Home Bias in Government Procurements: A Dynamic Contest Model

This paper models an international contest for government procurement as a dynamic game between a domestic firm and a foreign firm. We show that trade liberalization, in the form of a reduction in bias against the foreign firm, improves both domestic and global welfare if (i) either the foreign firm's profit is sufficiently large or (ii) the initial degree of home bias is sufficiently small. If the initial home bias is large, a small reduction in the bias may reduce welfare.