Discriminatory procurement policy with cash limits

This paper presents a counter example to the Miyagiwa (1991) American Economic Review 81, 1320-1328) claim that discriminatory government procurement policy is ineffective as a protectionist device, when the goods are also consumed by the private sector. The procurement sector is a homogeneous product Cournot-Nash duopoly, with a home and a foreign firm. The procurement policy takes the form of an ad valorem premium 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 unit elastic, corresponding to cash limits to public expenditure, and providing the home firm is smaller than the foreign firm. By adding a competitive export sector, the paper also derives sufficient conditions for macroeconomic coordination failures to occur.