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Infant Industry Protection Revisited

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  • Aditya Bhattacharjea

Abstract

In 1791, Alexander Hamilton suggested that assuring protection to domestic entrants Could pre-empt entry-degterrence by foreign firms. This paper reformulates his Argument in game-theoretic terms with asymmetric cost information, imposing the Requirement that both the foreign firm's threat and the home governments's promise of Protection should be credible. It derives a simple optimal tariff formula that depends Only on the expectation of foreign costs. It then shows that this tariff can lead to Welfare-decreasing entry, but only if thee foreign is relatively inefficient. However, If the formula is applied with dynamic consistency, and is rationally anticipated by both foreign and domestic firms, it prevents foreign entry-deterrence and improves deomestic welfare. [F13, 019]

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 16 (2002)
Issue (Month): 3 ()
Pages: 115-133

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Handle: RePEc:taf:intecj:v:16:y:2002:i:3:p:115-133

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References

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  1. S. Lael Brainard & David Martimort, 1992. "Strategic Trade Policy With Incompletely Informed Policymakers," NBER Working Papers 4069, National Bureau of Economic Research, Inc.
  2. Donald J. Wright, 1995. "Incentives, Protection, and Time Consistency," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 929-38, November.
  3. Herander, Mark G & Kamp, Brad, 1999. "Tariff Policy and Entry with Cost-Based Informational Asymmetries," Economic Inquiry, Western Economic Association International, vol. 37(1), pages 60-73, January.
  4. Dixit, Avinash, 1988. "Anti-dumping and countervailing duties under oligopoly," European Economic Review, Elsevier, vol. 32(1), pages 55-68, January.
  5. Collie, David, 1992. "Export Subsidies, Entry Deterrence and Countervailing Tariffs," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(2), pages 136-51, June.
  6. Qiu, Larry D, 1995. "Strategic Trade Policy under Uncertainty," Review of International Economics, Wiley Blackwell, vol. 3(1), pages 75-85, February.
  7. Brainard, S Lael & Martimort, David, 1996. "Strategic Trade Policy Design with Asymmetric Information and Public Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(1), pages 81-105, January.
  8. James A. Brander & Barbara J. Spencer, 1981. "Tariffs and the Extraction of Foreign Monopoly Rents under Potential Entry," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 371-89, August.
  9. Neary, J Peter, 1991. "Cost Asymmetries in International Subsidy Games: Should Governments Help Winners or Losers?," CEPR Discussion Papers 560, C.E.P.R. Discussion Papers.
  10. Collie, David R & Hviid, Morten, 1999. "Tariffs as Signals of Uncompetitiveness," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 571-79, November.
  11. Raff, Horst, 1994. "Incentive-compatible regulation of foreign-owned subsidiaries: A tax simulation for the Jamaican bauxite industry," Journal of Development Economics, Elsevier, vol. 45(2), pages 339-364, December.
  12. Neary, J.P. & Leahy, D., 1998. "Strategic Trade and Industrial Policy Towards Dynamic Oligopolies," Papers 98/14, College Dublin, Department of Political Economy-.
  13. Kolev, Dobrin R. & Prusa, Thomas J., 1999. "Tariff policy for a monopolist in a signaling game," Journal of International Economics, Elsevier, vol. 49(1), pages 51-76, October.
  14. Cooper, David J & Garvin, Susan & Kagel, John H, 1997. "Adaptive Learning vs. Equilibrium Refinements in an Entry Limit Pricing Game," Economic Journal, Royal Economic Society, vol. 107(442), pages 553-75, May.
  15. Gresik, Thomas A. & Nelson, Douglas R., 1994. "Incentive compatible regulation of a foreign-owned subsidiary," Journal of International Economics, Elsevier, vol. 36(3-4), pages 309-331, May.
  16. Collie, David & Hviid, Morten, 1993. " Export Subsidies as Signals of Competitiveness," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 327-39.
  17. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May.
  18. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
  19. Davies, Stephen W. & McGuinness, Anthony J., 1982. "Dumping at less than marginal cost," Journal of International Economics, Elsevier, vol. 12(1-2), pages 169-182, February.
  20. Bhattacharjea, Aditya, 1995. "Strategic tariffs and endogenous market structures: Trade and industrial policies under imperfect competition," Journal of Development Economics, Elsevier, vol. 47(2), pages 287-312, August.
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Cited by:
  1. Delia Iona┬║cu & Kresimir Zigic, 2005. "Strategic Tariff Protection, Market Conduct, and Government Commitment Levels in Developing Economies," CERGE-EI Working Papers wp249, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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