In 1791, Alexander Hamilton suggested that assuring protection to domestic entrants could pre-empt entry-deterrence 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 government'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 the foreign firm 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 domestic welfare. [F13, O19]
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Volume (Year): 16 (2002) Issue (Month): 3 (October) Pages: 115-133 Download reference. The following formats are available: HTML
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