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Second-Best Trade Policies, R&D Spillovers And Government (In)Ability To Precommit In An Intra-Industry Trade Framework

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Executive Summary

The authors introduce an intra-industry setup in order to reconsider the consequences of government (in)ability to precommit to its policies when it is constrained to only one policy instrument (second-best policies). This setup nests the standard frameworks of strategic trade policy - the "Third-market" and the "Home-market" framework. They also analyze how robust the signs of particular policy instruments (R&D subsidies) are when passing from the "Second-best" to the "First-best" policy and show that in the considered setup this issue is closely related to the issue of the government commitment.

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