The Korean Economic Review
Export Subsidies and Least Developed Countries: An Entry-Deterrence Model under Complete and Incomplete Information
Kyoungwon Rhee (Dongguk University) and Moonsung Kang (Korea University)Year 2019Vol. 35No. 1
AbstractTo explore the export subsidy policies in technologically inferior countries, we consider anentry-deterrence model in which firms compete á la Bertrand if entry occurs. Undercomplete information, only a subsidy policy can deter entry. We also check whether a “nosubsidy” policy can deter entry under incomplete information, in which the existence of anexport subsidy policy is assumed to be unknown to the foreign firm. In the separatingequilibria, it is optimal for the government not to provide export subsidies because they arefinancially burdensome given the technological inferiority of the domestic firm beingsubsidized. However, in the pooling equilibria, under certain conditions, even the firm thatdoes not benefit from a subsidy policy can deter the entry of a more technologically advancedfirm, thereby granting an incentive for the government to employ a policy of strategicambiguity in order to prevent the disclosure of information about its export subsidies.