Fickle trade policy, productivity gaps and increasing marginal costs

Recent real-world production asymmetry and model tractability have brought increasing attention to firm heterogeneity in monopolistic competition. Nevertheless, how productivity gaps in oligopolies affect trade policy tends to be overlooked. This study considers how the productivity gap between efficient and less-efficient oligopoly firms affects export policies in a third-market model. Firms have linear quadratic costs. We show that the subsidy-tax-subsidy effect appears to the degree of the productivity gap. We also show that a widening productivity gap increases the exporter's welfare. Hence, there may be some rationale for creating a national champion.