Export market correlation and strategic trade policy

In the traditional models of strategic trade policy pioneered by Brander an d Spencer, exports of the domestic firm, engaged in a Cournot-Nash competit ion with the foreign firm in a neutral market, must be subsidized to maximi ze national welfare. We demonstrate that when the firms play the Cournot-Na sh game in two stochastic and positively correlated markets, it may be opti mal to tax exports to the more volatile market while subsidizing it in the other. The policy combination reduces the amplitude of aggregate profit and raises the utility of the risk-averse firm in a manner similar to the theo ry of portfolio choice. JEL Classification: F12, D18.