Multilateral subsidy games

This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are “friendly”, raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention. For helpful comments we are grateful to two referees, to Arijit Mukherjee, and to participants in seminars at Prague and UCD, at the EEA Conference in Lausanne and at the GEP Conference on “New Directions in International Trade Theory” at the University of Nottingham, June 2007. Dermot Leahy acknowledges the support of the Science Foundation Ireland Research Frontiers Programme (Grant MAT 017).