FLEXIBILITY VERSUS COMMITMENT IN STRATEGIC TRADE-POLICY UNDER UNCERTAINTY - A MODEL OF ENDOGENOUS POLICY LEADERSHIP

I consider a tax-subsidy game played between governments. Governments choose their policies either prior to observing the random, demand intercept, or subsequent to this observation. The resulting equilibrium frequently involves asymmetric timing of policy choice. One government moves first and is the leader. The other government delays its commitment, thereby better tailoring its policy to the environment. In the low noise case, there are two such equilibria, though one may Pareto dominate the other. In the large noise case, such an equilibrium exists when the number of firms differs across countries, in which case this is the unique equilibrium of the game. © 1991.