Beschreibung:
This paper analyzes governments’ choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four‐stage game, two types of equilibria emerge: a quasi‐free‐trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade.