Endogenous comparative advantage via symmetry‐breaking policy equilibrium

In this study, we analyze a symmetric policy game in a two‐country model in which domestic policy affects a Ricardian comparative advantage. Considering a two‐good, one‐factor set‐up in which each country's government provides a productive public good, we show that ex ante identical countries under free trade always choose different levels of public goods in the Nash equilibrium – meaning symmetry‐breaking always occurs. We also examine how our analysis is modified in the presence of trade costs and in a multi‐good set‐up. Moreover, we present a more elaborate model with input–output linkages and entry regulation in an upstream market as an application.