Uncertainty and the Choice of Trade Policy in Oligopolistic Industrie s.

This paper investigates the design of trade policies in an uncertain world. Governments in two countries select between direct quantity controls and subsidies in an attempt to shift profits in favor of domestic, imperfectly competitive firms. The equilibrium of this policy game depends on the variability of the environment. In a world of certainty, both governments choose to regulate their firms through direct quantity controls. With a sufficient amount of uncertainty, both governments regulate their firms through subsidies. This result reflects an important tradeoff between the strategic advantages of direct quantity controls and flexibility gained by the use of subsidies. Copyright 1989 by The Review of Economic Studies Limited.