Strategic trade policy and signaling costs with differentiated goods

Abstract

We consider a trade policy model, where the costs of the home firm are private information but can be signaled through theoutput levels of the firm to a foreign competitor and a home policymaker. We compute the separating equilibrium and theBayesian Nash equilibrium, and we compare the subsidies, firms' expected profits and home government's welfare in bothequilibria, for different values of the own price effect parameter.