Political Constraints and Impatience as Causes of the Lack...

In this paper we present a model that describes how the existence of a credible treat of liberalization may serve as an incentive for domestic firms to adopt a new technology, but also it describes how historical political constraints by themselves, or in combination with a sufficient degree of impatience, may be the cause of bankruptcy in some industries when a closed economy is opened to foreign competition. The model assesses the behavior of two types of firms, impatient and patient, which may or may not adopt foreign technology, but the government only appears in the model as a passive player, consistently with a credible date of openness. The costs involved are not only economic but also political. These political costs are, nonetheless, measured in monetary terms. At some moment, which depends on the political constraints, a third firm enters the market, the foreign one. Depending on the national firms´ degree of impatience and the costs associated with political constraints, Nash equilibria, in which one or even both firms at the moment the economy is openedhave to shut down, exist. All these strategies result to be subgame perfect equilibrium. Further, as a by-product, our results shed new light on the topic of temporary protection: The degree of impatience, by itself, my be the reason of why temporary protection may or may not fail to induce firms to adopt advanced technologies, even if the threat of liberalization is credible. We make, also, a preliminary welfare study, which suggests that some of the equilibria found may pass the renegotiation proof criteria.