Strategic Trade Policy under Asymmetric Information about Market Demand

This paper examines strategic trade policy with unilateral intervention under asymmetric information about market demand. In an international Cournot-duopoly, the choice of the domestic country's export subsidy signals the domestic country's private information to the foreign firm. It is shown that this signalling effect weakens the well-known commitment effect of positive export subsidies. The optimal export subsidy under asymmetric information is smaller than the optimal export subsidy with perfect information. If the range of the uncertain market demand is sufficiently large, then the optimal export subsidy is negative and the domestic country's welfare may be smaller than the foreign country's welfare.