Discriminatory procurement policy with cash limits can lower imports: an example
This paper presents a counterexample to the Miyagiwa (1991) claim that discriminatorygovernment procurement policy is ineffective as a protectionist device, when the goods are alsoconsumed by the private sector. The procurement sector is a homogeneous product Cournot-Nashduopoly, with a home and a foreign firm. The procurement policy takes the form of an ad valorempremium over the import price. If both the firms play the output game in strategic complements,procurement policy can lower imports. This possibility arises when the product demand is unitelastic, corresponding to cash limits to public expenditure, and providing the home firm is smallerthan the foreign firm. By adding a competitive export sector, the paper also derives sufficientconditions for macroeconomic coordination failures to occur.
Discriminatory government procurement policy, Cash limits, Coordination failures.
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