Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2026-09-20
Number: 26-071/VII
Author-Name: Jaap Roelen
Author-Workplace-Name: University of Amsterdam
Author-Name: Martijn Ketelaars
Author-Workplace-Name: Tilburg University
Author-Name: Peter Kort
Author-Workplace-Name: Tilburg University
Title: A Subsidization Dilemma: the Effect of Shadow Cost of Public Funds and Consumer Distribution
Abstract: This article studies subsidy competition in a two-country-two-firm model incorporating bilateral trade, consumer distribution, and a shadow cost of public funds. Governments choose subsidies to maximize domestic or international welfare, with cooperation defined by subsidy choices maximizing international welfare. Under equal consumer bases, the subsidy game is a prisoner's dilemma if and only if the shadow cost is positive. This creates an opportunity for cooperation; without cooperation, however, governments oversubsidize their firms. We find that incentives to cooperate increase with the shadow cost. However, sufficiently unequal consumer distributions can eliminate the prisoner's dilemma, removing the larger country's incentive to cooperate.
Classification-JEL: D43, F12, H20
Keywords: Bilateral Trade, International Duopoly, Prisoner's Dilemma, Shadow Cost of Public Funds, Subsidy
File-URL: https://papers.tinbergen.nl/26071.pdf
File-Format: application/pdf
File-Size: 965.838 bytes
Handle: RePEc:tin:wpaper:20260071