A two-stage Bertrand duopoly model demonstrates how the sequence of firm and government actions can explain the origins of export credit subsidies, and can affect the welfare consequences of international agreements to adopt subsidy rate ceilings. Firms act first by stating prices in applications for export credit, and can induce positive subsidies by inflating the prices. The subsidies transfer rents from governments to firms without changing welfare, defined as profits less subsidy expenditures. Governments become the first to act by adopting subsidy rate ceilings that bind. Ceilings cause firms to lower prices, such that if a positive ceiling binds, welfare falls.

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Persistent URL dx.doi.org/10.1016/S0022-1996(87)80002-8
Journal Journal of International Economics
Carmichael, C. M. (1987). The control of export credit subsidies and its welfare consequences. Journal of International Economics, 23(1-2), 1–19. doi:10.1016/S0022-1996(87)80002-8