Export Subsidies and Least Developed Countries: An Entry-Deterrence Model under Complete and Incomplete Information

Abstract

To explore the export subsidy policies in technologically inferior countries, we consider an entry-deterrence model in which firms compete a la Bertrand if entry occurs. Under complete information, only a subsidy policy can deter entry. We also check whether a “no subsidy” policy can deter entry under incomplete information, in which the existence of an export subsidy policy is assumed to be unknown to the foreign firm. In the separating equilibria, it is optimal for the government not to provide export subsidies because they are financially burdensome given the technological inferiority of the domestic firm being subsidized. However, in the pooling equilibria, under certain conditions, even the firm that does not benefit from a subsidy policy can deter the entry of a more technologically advanced firm, thereby granting an incentive for the government to employ a policy of strategic ambiguity in order to prevent the disclosure of information about its export subsidies.