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This paper examines the optimal export policies when ex ante negotiation oversubcontract manufacturing occurs between two competing international-firms. Itshow that it could be optimal for the exporting country to adopt either a differentor a parallel trade policy between the two exporting goods (the final product andthe subcontracted product). However, a different trade policy that taxes the final-product export and subsidizes the subcontracted-product export is not ever optimal.When the exporting firm is a pure subcontractor, taxing the single export(subcontracted product) becomes the only optimal trade policy of the exportingcountry. Morever, the exporting country imposes a less aggressive trade policy inresponse given that the importing country inflicts a more aggressive trade policy.JEL classification: F13 and L13


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Subcontracting, International Trade, Nash Bargaining, TradePolicy 974 Ho-Chyuan Chen and Wen-Jung LiangI. IntroductionSubcontracting has become an increasingly popular method for firms to avoidthe increasing opportunity costs of in-house production.