NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Free Trade vs. Strategic Trade: A Peek into Pandora's Box

Gene M. Grossman, Giovanni Maggi

NBER Working Paper No. 6211
Issued in October 1997
NBER Program(s):   ITI

We investigate whether a welfare-maximizing government ought to pursue a program of" strategic trade intervention or instead commit itself to free trade when domestic firms will have an opportunity to manipulate the government's choice of the level of" intervention. Domestic firms may overinvest in physical and knowledge capital in a regime of" strategic intervention in order to influence the government's choice of subsidy. In the event commitment to free trade may be desirable even in settings where profit-shifting would be" possible. We analyze the desirability of such a commitment when the government is well" informed about firms' types and actions, and when it suffers from an informational disadvantage."

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Document Object Identifier (DOI): 10.3386/w6211

Published: Global Integration and Competition, R. Sato, R.V. Ramachandran and K. Minoeds., Boston/Dordrecht/London: Kluwer Academic Publishers, 1998.

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