OPTIMAL EXPORT SUBSIDY WHEN DEMAND IS UNCERTAIN

A standard result in export subsidy/tax game models is that if governm ents can credibly precommit themselves to a particular trade policy, a n export subsidy (tax) is optimal when firms engage in quantity (price , respectively) competition (Brander and Spencer, 1985; Eaten and Gros sman, 1986). In this paper, we consider a model of dynamic duopoly whe n demand in the importing country is uncertain. We show that in a symm etric equilibrium a subsidy is generally optimal for price competition . (C) 1997 Elsevier Science S.A.