Free Trade vs. Strategic Trade: A Peek Into Pandora’s Box

Abstract

Wei nvestigate whether aw elfare-maximizing govemment ought to pursue ap rogram of strategic trade intervention or instead commit itself to仕切tradewhen，in the former case，do mestic 日rmswill have an opportunity to manipulate the govemment's choice ofthe level ofintervention. Domestic firms may overinvest in physical and knowledge capital in a regime of strategic intervention in order to influence the govemment's choice of subsidy. In the event，a c ommitment to企eetrade may be desirable even in settings where profit-shifting would be possible. We analyze the desirability of such a commitment when the govemment is well informed about firms' types and actions，an d whenit suffers from an informational disadvantage.