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Title: Industrial subsidy policy and the optimal level of specialization
Authors: Dubey, Ram Sewak
Kang, Minwook
Keywords: Social sciences::Economic development
Issue Date: 2020
Source: Dubey, R. S. & Kang, M. (2020). Industrial subsidy policy and the optimal level of specialization. Economic Modelling, 91, 81-88.
Journal: Economic Modelling
Abstract: Despite compelling rationale based on the theory of comparative advantage for free trade, many countries adopt restrictive trade practices. In this paper we investigate this puzzle in a stylized two-country two-good Ricardian model of international trade. Governments can offer protection to domestic industries via industrial subsidy policy in this model. We prove the existence of a Nash equilibrium in the two-player game where industries choose the level of specialization. We determine the necessary conditions for complete specialization in (a) the free-trade regime; and (b) the protectionist regime implemented through industrial subsidy policy. Our results show that if the government intends to promote complete specialization, then a high degree of comparative advantage and a large elasticity of substitution between export and import goods are required. Empirical evidence on these two parameters indicate that complete specialization is unlikely to survive in the protectionist regime.
ISSN: 0264-9993
DOI: 10.1016/j.econmod.2020.05.025
Rights: © 2020 Elsevier B.V. All rights reserved.
Fulltext Permission: none
Fulltext Availability: No Fulltext
Appears in Collections:SSS Journal Articles

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