| Sumario: | A model in which 1 firm in each of 2 countries produces a homogenous good and sells it exclusively to a third country was developed. Each firm in the model simultaneously selected a supply function before a demand shock occurred, and the home countries were able to precommit to a subsidy function. A linear demand function with a constant common marginal cost and a linear-quadratic tax/subsidy schedule were used. The use of the model shows that the optimal marginal subsidy rate decreases with domestic exports. This prompts firms to select steeper supply functions, thereby softening competition. The strategic complementary relationship between the slopes of the firms' supply functions is key to these results.
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