Export Subsidies as Signals of Competitiveness.

In a Cournot duopoly model of international competition between a domestic and foreign firm, it is shown that when the foreign firm has incomplete information about the marginal cost of the domestic firm then the domestic government can use an export subsidy to signal the competitiveness of its firm. This signaling effect strengthens the usual profit-shifting argument for an export subsidy. The optimal export subsidy in the signaling equilibrium may be twice as large as the optimal profit-sharing export subsidy under complete information. Copyright 1993 by The editors of the Scandinavian Journal of Economics.