An Experimental Test of Strategic Trade Policy

In this experiment, we analyze the model of strategic trade policy proposed by Brander and Spencer (1985). Governments can choose whether or not to subsidize domestic firms. Firms compete in a Cournot duopoly, and they know the subsidy decisions when choosing output. Although the theoretical prediction is that firms are subsidized, it turns out that governments only rarely subsidize in experimental markets. Not subsidizing is rational given our observation that firms do not play according to the subgame perfect equilibrium when subsidies are given