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Essays on strategic trade policy : market uncertainty, incomplete information, and credit rationing Qiu, Dongxiao

Abstract

This dissertation is a collection of three essays on strategic trade policy. The main purpose of this research is to make contributions to the strategic trade literature by dealing with some of its interesting and important issues. The first essay extends the well-known Brander-Spencer (1985) model, by considering market uncertainty, endogenizing firms' choice of strategic variables, and introducing a quadratic export tax/subsidy scheme; and investigates the interrelationship between trade policies and market competition. It is shown that firms are not indifferent between setting prices and setting quantities in an uncertain environment. The quadratic export tax/subsidy scheme is proved superior to the linear export tax/subsidy scheme because the former has the unique ability to influence the domestic firm's choice of strategic variables and therefore to affect the market conduct in favour of the domestic country. The second essay explores an incomplete information version of the Brander-Spencer (1985) model, in which the domestic firm's production cost is private in-formation. This model has the distinguishing feature that it contains a mixture of screening and signalling problems. Because of this, policy makers are confronted by twin conflicting policy objectives: choosing between an information revealing policy menu and an information concealing uniform policy. We prove that the policy menu is preferred to the uniform policy in quantity competition while the opposite is true in price competition. In essay three, we examine the implications of credit rationing for international trade. Development and production of new products often involves uncertainty (e.g. R&D uncertainty and demand uncertainty), which could lead to credit rationing. We find that the presence of credit rationing may give partial explanation for the indeterminacy of the pattern of trade between two similar countries. When credit is rationed, two-way trade is less likely to occur.

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