Lecture 14 - Industrial Policy and Subsidies Flashcards
(14 cards)
How does the WTO Agreement on Subsidies and Countervailing Measures define a subsidy?
“A financial contribution by a government or any public body within the territory of a member”
What constitutes a “financial contribution” according to the WTO definition of a subsidy?
> Direct transfer of funds (e.g., grants, loans, equity infusions), including potential transfers or liabilities (e.g., loan guarantees).
> Government revenue otherwise due that is foregone or not collected (e.g., tax credits, reduced tax rates).
> Government provision of goods or services other than general infrastructure, or government purchases of goods.
> Government payments to a funding mechanism, or entrustment or direction of private entities by the government to carry out functions listed above.
Describe the strategic investment game timing discussed, featuring an incumbent (Firm 1) and a potential entrant (Firm 2).
First stage: Incumbent chooses some irreversible investment K1.
Second stage: Observing K1, the entrant decides whether to enter or not.
Product market decisions: If the entrant enters, there is duopoly; if not, the incumbent remains a monopoly.
In the context of the strategic investment game, what does “Entry Deterrence” mean?
The incumbent chooses investment K1 such that the potential entrant’s profit is less than or equal to zero, aiming to make entry unprofitable.
How does the strategic effect influence an incumbent’s investment decision under entry deterrence?
If investment makes the incumbent tough (reduces entrant’s profit), there’s an incentive to overinvest to look aggressive (top dog strategy).
If investment makes the incumbent soft (raises entrant’s profit), there’s an incentive to underinvest to look aggressive (lean and hungry look).
What is a key insight for trade policy analysis from the strategic commitment models?
When overinvestment by a home firm could deter entry of rival foreign firms, potentially leading to higher profits for the home firm, the government may have an incentive to provide subsidies to investment, such as low-interest loans.
Under what circumstances might a subsidy to investment have an undesirable effect of inducing entry by rivals?
In cases where a home firm that wants to appear aggressive needs to underinvest, for example, if the firm’s investment has positive external economies of scale.
What is a “Reaction Curve” in the Cournot model of export subsidies?
Equations that show the optimal export quantity for one firm given the export quantity of the other firm.
Because the goods are substitutes, the reaction curves are downward sloping.
How does an export subsidy by the foreign country affect the equilibrium export quantities of the foreign and home firms in the Cournot model?
The foreign firm’s export quantity increases (xN(s) > xN) and the home firm’s export quantity decreases (xN(s) < xN)
What was the outcome of the 1992 Aircraft Subsidy Agreement between the US and EU regarding subsidies to Boeing and Airbus?
The agreement limited development subsidies to 33%, prohibited production subsidies, and limited government interest rate subsidies.
Irwin and Pavcnik (2004) estimated that prices of commercial aircraft rose 3.1% to 8.8% as a result.
What are learning by doing industries?
Industries characterized by a high fixed cost for the initial production unit and a decline in per-unit production costs as cumulative production increases. Expertise rises and costs decline as a firm learns from its own experience
What were some findings from Irwin and Klenow (1994) studying learning by doing in DRAMs semiconductors?
Learning rates averaged 20 percent
Firms learned three times more from their own cumulative production than from others
Learning spilled over equally between firms in different countries as within a country
What was the impact of the EU’s import restrictions on Chinese solar panel firms in 2012-2013, according to Crowley, Meng and Song (2019)?
The restrictions had a negative impact on the profitability of private sector firms, especially those that are listed in NY, but did not impact SOEs.
How did Chinese government policies affect stock prices of Chinese solar panel firms during 2012-2013, according to Crowley, Meng and Song (2019)?
The policies benefited firms listed in New York, but had almost no impact on publicly listed State Owned Enterprises.
