Strategic R&D Commitment and the Gains from Trade |
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Authors: | Gerda Dewit Dermot Leahy |
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Affiliation: | 1. +353‐(0)1‐7083776+353‐(0)1‐7083934 0000-0003-2287-1950 National University of Ireland Maynooth, Department of Economics, Finance and Accounting;2. National University of Ireland Maynooth, Department of Economics, Finance and Accounting |
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Abstract: | 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. |
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