Profit-sharing and welfare in an export subsidy game

Abstract

This paper studies an export subsidy game in a duopoly in which one firm engages in sharing profits with its union. In a non-cooperative equilibrium of an export subsidy game without any cost advantage of firms, the export subsidy to the profit-sharing firm is smaller than the export subsidy to the non-sharing firm, and the output of the profit-sharing firm is smaller than the output of the non-sharing firm. Thus, in an export subsidy game, a profit-sharing contract reduces the welfare in the country.