Gerda Dewit

Export Promotion Via Official Export Insurance

Proponents of free trade argue that export promotion distorts competition and undermines the multilateral trade system. In most countries export insurance is provided by the government and, consequently, is driven more by a broad range of policy objectives than purely insurance principles. This paper, however, shows that export promotion does not necessarily imply trade distortions and that most export destinations do not benefit from insurance premium subsidies. A significant policy implication of these findings is that the WTO and the EU are correct not to banish completely official export insurance.

Employment Protection and Globalisation in Dynamic Oligopoly

We construct a model in which oligopolistic firms decide where to locate. Firms choose to locate either in a country where employment protection implies costly output adjustments or in one without adjustment costs. Using a two-period three-stage game with uncertainty it is demonstrated that location is influenced by both flexibility and strategic concerns. We show that the strategic effects under Cournot work towards domestic anchorage in the country with adjustment costs while those under Bertrand do not. Strategic agglomeration can occur in the inflexible country under Cournot and even under Bertrand provided uncertainty and foreign direct investment costs are low.

Intervention in risky export markets: insurance, strategic action or aid?

Abstract Because the use of trade policy is limited by international institutional arrangements, governments pursuing a policy of export promotion may want to use more indirect instruments to achieve their objectives. In that context, this paper focuses on the public provision of export insurance. While the prime objective is insurance against the risk of default faced by firms exporting to risky markets, these insurance programmes are often embedded in more global policy objectives of the exporting countrys government. This paper investigates how premium rating of official export insurance is affected by strategic export promotion and the pursuit of other political objectives.

Credibility and Reputation Building in the Developmental State: A Model with East Asian Applications

Abstract We use a game-theoretic model to analyze the role of credibility, reputation and investment coordination in a developmental state. Our model focuses on why a “soft” state serving narrow social groups so often obtains in less-developed countries and under what conditions a “hard” or developmental state can emerge. The model highlights the dilemma that although state and private sector alike may want economic growth, both must simultaneously invest to achieve it. But the equilibrium outcome—analogous to the prisoners dilemma—is investment by neither. Even when initial conditions are favorable and a state is potentially developmental with the genuine capability to elicit private sector investment, this may not materialize and an equilibrium of low, or no, investment will prevail. To avoid this deadlock and foster growth, the successful developmental state must demonstrate commitment by promoting its “developmental” credentials through a process of reputation building. A consequent incentive to act “tough” together with seeming advantages of authoritarianism in implementing the developmental state may help to explain why it is often associated with an authoritarian political system.

Rivalry in Uncertain Export Markets: Commitment versus Flexibility

This paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms’ investment decisions. When the government can commit to an export subsidy, it may choose to over- or under-subsidise to deter private-sector capital commitment. When the government chooses its trade policy flexibly, the relative value of commitment to the unsubsidised foreign firm is greater than to the subsidised home firm. Finally, a flexible subsidy regime is compared to free trade.

Risky Business: Multinationals, Uncertainty and Asymmetric Insurance

A partial equilibrium model is used to examine the international production allocation of a two-plant multinational firm that is confronted with uncertainty with respect to foreign sales. The firm produces identical products in both plants, using firm-specific factors. The internationally price-discriminating multinational has monopoly power in both segmented markets. The analysis focuses on how asymmetric insurance facilities between the firms home and host country influence its international production allocation and level of intra-firm trade. Copyright 2002 by The London School of Economics and Political Science

Employment Protection, Flexibility and Firms' Strategic Location Decisions under Uncertainty

We construct a model in which oligopolistic firms decide between locating in a country where employment protection implies costly output adjustments and in one without employment protection. Using a two-period three-stage game with uncertainty, we demonstrate that location is influenced by both flexibility and strategic concerns. The strategic effects under Cournot work towards domestic anchorage in the country with employment protection while those under Bertrand do not. Strategic agglomeration can occur in the inflexible country under Cournot and even under Bertrand, provided uncertainty and foreign direct investment costs are low.

Strategic R&D Commitment and the Gains from Trade

This paper examines how trade liberalisation affects innovation, profits and welfare in a reciprocal markets model when firms pre-commit to R&D investment. First, we show that, for a range of trade costs, there are multiple equilibria, implying that the path of trade liberalisation is not unique. Second, welfare at “incipient” trade always exceeds welfare in autarky. Third, we show that, if the effectiveness of R&D is sufficiently high, trade always yields higher welfare than autarky. These new results suggests that when firms, operating in an oligopolistic environment, strategically precommit to R&D, the welfare gains from trade liberalisation are enhanced.

SHORT-RUN POLICY COMMITMENT WHEN INVESTMENT TIMING IS ENDOGENOUS: ‘MORE HARM THAN GOOD?’

We introduce endogenous leadership in a game between government and firms, in which the government has short-run commitment power only and firms choose when to invest. We show that firms that delay investment in the absence of government intervention have an incentive to invest early and strategically under policy activism. Then, even though a policy scheme succeeds in correcting an existing distortion targeted by the government, it can create a new and potentially more harmful one. We investigate when the government may do better by adhering to laissez-faire than by engaging in active policy intervention.

CORPORATE TAX GAMES WITH CROSS-BORDER EXTERNALITIES FROM PUBLIC INFRASTRUCTURE

We construct a model of corporate tax competition in which governments also use public infrastructure investment to attract foreign direct investment, thus enhancing their tax bases. In doing so, we allow for cross-border infrastructural externalities. Depending on the externality, governments are shown to strategically over- or underinvest in infrastructure. We also examine how tax cooperation influences investment in infrastructure and find that welfare may be lower under tax cooperation than under tax competition; this is the case when infrastructure is very effective in raising the tax base and generates a large negative cross-border externality. (JEL F23, H40)