Export Subsidies in a Strategic Trade Policy Approach under Asymmetric Competition with ...

54 Pages·2013·1.52 MB·English

by  Dawud Ansari

Technische Universität Berlin
Berlin Institute of Technology

Dissertation for the Degree
Bachelor of Science
in Economics

Export Subsidies in a Strategic Trade Policy Approach under
Asymmetric Competition with Reference to Agricultural Trade

Faculty VII / School of Economics and Law
Department for Microeconomics
Prof. Dr. Radosveta Ivanova-Stenzel

Supervised by:
Dr. Thomas Giebe

by
Dawud Ansari
(331913)

May 2013

Eidesstattliche Versicherung

Hiermit erkläre ich an Eides statt, dass ich die vorliegende Arbeit selbstständig und eigenhändig
sowie ausschließlich unter Verwendung der aufgeführten Quellen und Hilfsmittel angefertigt
habe.

Berlin, den 08.05.2013

Dawud Ansari

Abstract

This dissertation does take a look at the frequently discussed issue of export subsidies. It
reviews them in the classical situation of perfect competition and analyses thereupon possible
situations in which export subsidies are beneficial for domestic welfare, based on the imperfect
competition framework of Brander-Spencer model. After replicating their original results, this
dissertation shows that the assumptions of increasing returns to scale and risk aversion in the
presence of random supply shocks enhance the government’s incentive to subsidise the
domestic exporting industry. The solely algebraic analysis focuses mostly on methods of
comparative statics and examines the effects of a subsidisation on various variables.

Diese Arbeit befasst sich mit dem vielfach diskutierten Thema der Exportsubventionen. Sie gibt
einen Überblick über die klassische Sicht der vollständigen Konkurrenz auf sie und analysiert
mögliche Situationen, in denen Exportsubventionen, basierend auf dem Brander-Spencer-
Modell, vorteilhaft sind. Nach der Replikation ihrer ursprünglichen Ergebnisse wird gezeigt,
dass steigende Skalenerträge und Risikoaversionen in der Gegenwart von Angebotsschocks den
Anreiz für Regierungen erhöhen, den inländischen Export zu subventionieren. Die rein
algebraische Analyse basiert größtenteils auf Methoden der komparativen Statik und
untersucht den Einfluss der Subvention auf verschiedene Variablen.

Table of Content

List of Abbreviations .................................................................................................................................... iii
Table of Figures .............................................................................................................................................. iv
1. Introduction ................................................................................................................................................. 1
1.1 Motivation .............................................................................................................................................................. 3
1.2 Outline & Methodology ..................................................................................................................................... 5
2. Export Subsidies under Perfect Competition................................................................................... 6
2.1 Equilibrium under Autarky ............................................................................................................................ 6
2.2 Free Trade Equilibrium .................................................................................................................................... 9
2.3 Introduction of an Export Subsidy ............................................................................................................ 12
2.3.1 Effects on Welfare ............................................................................................................................... 12
3. Modelling Export Subsidies under Imperfect Competition ...................................................... 16
3.1 General Assumptions and Structure ........................................................................................................ 16
3.2 Comparative Statics and Solution: Constant Marginal Costs ......................................................... 18
3.2.1 Cournot Subgame ................................................................................................................................ 18
3.2.2 Government Stage............................................................................................................................... 22
3.2.3 Consequences for Foreign Welfare .............................................................................................. 23
3.2.4 Quantification under Linear Demand ......................................................................................... 24
3.3 Comparative Statics under Falling Marginal Cost Structure .......................................................... 26
3.3.1 Welfare Effects and Government Decision ............................................................................... 30
3.4 Uncertainty in Domestic Supply ................................................................................................................ 31
3.4.1. Modelling Supply Shocks and Risk Aversion .......................................................................... 32
3.4.2. Comparative Statics .......................................................................................................................... 34
4. Conclusion & Remarks ........................................................................................................................... 36
Appendix .......................................................................................................................................................... 39
Proof I ................................................................................................................................................................. 39
Proof II ................................................................................................................................................................ 39
Proof III .............................................................................................................................................................. 39
Derivation I ....................................................................................................................................................... 40
Data Set I ............................................................................................................................................................ 42
References & Bibliography ....................................................................................................................... 43
List of Abbreviations

CAP Common Agricultural Policy
const. constant
e.g. exempli gratia (lat.)
EQ Equilibrium
EU European Union
FOC first order condition
i.e. id est (lat.)
MC marginal cost
MR marginal revenue
Mt megaton [metric]
R&D research and development
SOC second order condition
SPNE subgame perfect Nash equilibrium
US United States of America

iii
Table of Figures

Figure 1: Export Quantity in Mt of Cereals in Selected Regions [Data from FAOSTAT] .................... 4
Figure 2: Partial Market Autarky Equilibrium under Perfect Competition with Exemplary
Functions .............................................................................................................................................................................. 7
Figure 3: Free Trade Equilibrium Implied by Excess Curves in the World Market ............................ 10
Figure 4: Welfare and Quantity Effects of Free Trade in the Domestic Economy................................ 11
Figure 5: Post-Subsidy Welfare in Domestic Economy ................................................................................... 13
Figure 6: Game Structure ............................................................................................................................................ 17
Figure 7: Cournot Diagram with Pre- and Post-Subsidy EQ under Const. MC ...................................... 21
Figure 8: Accelerating Effect on Quantities in Falling MC Structure ......................................................... 29
Figure 9: Supply Shocks on Domestic Production - Pre- and Post-Subsidy ........................................... 33

iv