Dundee Discussion Papers in Economics 100:Targeted strategic trade policy with domestic cost heterogeneity

This paper examines optimal strategic trade policy under oligopoly with many home and foreign firms when firms have different levels of efficiency and a trade-off exists between the subsidy bill and firms’ profits. The first-best policy involves a structure of firm-specific export subsidies and export taxes in which the government favours the most efficient firms unless the social cost of funds is sufficiently high. When the policy is constrained to a uniform subsidy, the optimal policy depends on the relative number of home and foreign firms and on the curvature of demand. Deficiencies of the uniform subsidy are examined