Strategic Trade Policy in the Presence of Consumer Learning

In: Economica, Volume 67, Issue 266, p. 283-295

Abstract

This paper explores the potential role for strategic trade policy when demand is impacted by consumer learning. In a linear Cournot model, the optimal subsidy is shown to be increasing in both the firm‐specific learning and learning spillovers among home firms when firms can precommit; however, when precommitment by firms and/or the government is not possible, strategic behaviour by firms may more than offset the infant industries' incentive for an export subsidy. A calibration exercise illustrates the impact of consumer learning on the optimal subsidies and also demonstrates the sensitivity of the policy prescription.