[ARI Working Paper Series No. 28]

Export subsidies and least-developed countries:

entry-deterrence model under complete and incomplete information

Kyoungwon Rhee

Department of Economics, Dongguk University, Seoul, Republic of Korea; krhee@dongguk.edu

Corresponding author: Moonsung Kang

Division of International Studies, Korea University, 5-1 Anam-dong, Sungbuk-gu, Seoul, 136-701, Republic of Korea; Tel: +82-2-3290-2420; Fax: +82-2-3290-2420; mkang@korea.ac.kr

Abstract

This paper shows that export subsidies may be harmful when they are used to support a technologically inferior firm relative to the competing foreign firm in the exporting market. To explain this, we consider a three-period entry deterrence model, where, particularly, the firms producing a homogeneous good compete á la Bertrand if entry occurs. Under complete information, only a subsidy policy can deter entry. We also investigate if the ‘no subsidy’ policy can deter entry under incomplete information, where the government’s policy on export subsidy is assumed to be unknown to the foreign firm. We also found that our findings under Bertrand competition are not sensitive to the mode of competition and that the government of the LDC has an incentive to use a policy of strategic ambiguity not to disclose information on export subsidies.

Keywords: export subsidies; least-developed countries; entry-deterrence model; strategic trade policy; trade and development

JEL classification codes: F12; F13; L11; L12