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Incentives, Protection, and Time Consistency

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  • Donald J. Wright

Abstract

On the assumption that firm effort and costs are publicly observable, it is shown that a policy of future tariff removal is time inconsistent. As a result, less cost-reducing effort is undertaken by the firm than would be optimal under credible commitment. The introduction of asymmetric information has two offsetting effects on expected welfare: it decreases welfare because tariffs can no longer be contingent on the cost state and it increases welfare because it induces more cost-reducing effort.

Suggested Citation

  • Donald J. Wright, 1995. "Incentives, Protection, and Time Consistency," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 929-938, November.
    • Handle: RePEc:cje:issued:v:28:y:1995:i:4a:p:929-38
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    Cited by:

    1. Aditya Bhattacharjea, 2002. "Infant Industry Protection Revisited," International Economic Journal, Taylor & Francis Journals, vol. 16(3), pages 115-133.
    2. Gervais, Jean-Philippe & Lapan, Harvey E., 2002. "Time consistent export quotas in an oligopolistic world market," Journal of International Economics, Elsevier, vol. 56(2), pages 445-463, March.
    3. Aurora Gómez Galvarriato & César L. Guerrero-Luchtenberg, 2005. "Impatience, International Competitiveness, and Political," DEGIT Conference Papers c010_015, DEGIT, Dynamics, Economic Growth, and International Trade.
    4. Delia Baghdasaryan & Krešimir Žigić, 2010. "Tariffs, market conduct and government commitment," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(1), pages 91-122, January.
    5. Richard Damania, 2003. "Protectionist Lobbying and Strategic Investment," The Economic Record, The Economic Society of Australia, vol. 79(244), pages 57-69, March.
    6. Kresimir Zigic, 2011. "Strategic Interactions in Markets with Innovative Activity: The Cases of Strategic Trade Policy and Market Leadership," CERGE-EI Books, The Center for Economic Research and Graduate Education - Economics Institute, Prague, edition 1, number b06, May.

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