International R&D Rivalry and Industrial Strategy

Barbara J. Spencer, James A. Brander

NBER Working Paper No. 1192
Issued in August 1983
NBER Program(s):   ITI   IFM

This paper presents a theory of government intervention which provides an explanation for "industrial strategy" policies such as R&D or export subsidies in imperfectly competitive international markets. Each producing country has an incentive to try to capture a greater share of rent-earning industries using subsidies, but the subsidy-ridden international equilibrium is jointly suboptimal. The equilibrium in the strategic game involving firms and governments is modelled as a three stage subgame perfect Nash equilibrium. The assumption that the government is the first player in this game allows it to influence equilibrium industry outcomes by altering the set of credible actions open to firms.

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Published: Spencer, Barbara J. and James A. Brander. "International R&D Rivalry and Industrial Strategy." Review of Economic Studies, Vol. 50, No. 163, (October 1983), pp. 707-722.

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