An experimental test of strategic trade policy

In this experiment, we analyze the model of strategic trade policy as proposed by [Brander, J.A., Spencer, B., 1985. Export subsidies and international market share rivalry. Journal of International Economics 18, 83-100]. Governments can choose whether or not to subsidize domestic firms, and firms compete in a Cournot duopoly. Although the prediction is that governments subsidize, participants only rarely do so in the experimental markets. Not subsidizing is rational given that firms do not play according to the subgame perfect equilibrium when subsidies are given. In a treatment where firm decisions are made by the computer according to subgame perfection, government subsidies converge to equilibrium. (c) 2006 Elsevier B.V. All rights reserved.