COST ASYMMETRIES AND INDUSTRIAL POLICY IN VERTICALLY RELATED MARKETS

In this paper we examine how the conventional finding from de Meza (Canadian Journal of Economics, Vol. 19 (1986), pp. 347350) and Neary (Journal of International Economics, Vol. 37 (1994), pp. 197218) that the country with the lowest-cost firm provides the highest subsidy modifies in a model of vertically related markets characterized by Cournot competition. We show that the country where the sum of the costs of final-good production and intermediate-good production are the lowest provides the largest production subsidies to the final good and/or the intermediate good.