Unilateral minimum quality standards are endogenously determined as the outcome of a non-cooperative standard-setting game between the governments of two countries. Cross-country externalities from the implementation of minimum quality standards are shown to give rise to a Prisoners' Dilemma structure in the incentives of policy-makers leading to inefficient policy outcomes. The role of minimum quality standards as non-tariff barriers is examined and the scope for mutual gains from reciprocal adjustment in minimum standards analysed. The analysis delivers four results. First, there exist four unregulated Nash equilibria in minimum standards, two symmetric and two asymmetric, depending on the quality ranking of firms in each market. The analysis establishes that in all four cases, unilaterally selected minimum quality standards are inefficient as a result of cross-country externalities. Second, minimum quality standards are shown to operate as non-tariff barriers to trade. Third, the world welfare maximising symmetric standard can be reached through reciprocal adjustments in national minimum standards from either of the two symmetric Nash equilibria. Finally, the scope for mutually beneficial cooperation is shown to be significantly restricted when cross-country externalities are asymmetric. Asymmetric externalities make a cooperative agreement at the world optimum infeasible.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0858.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kyle Bagwell & Robert W. Staiger, 1999.
"An Economic Theory of GATT,"
American Economic Review,
American Economic Association, vol. 89(1), pages 215-248, March.
[Downloadable!] (restricted)
Other versions:
Kennan, John & Riezman, Raymond, 1988.
"Do Big Countries Win Tariff Wars?,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 81-85, February.
[Downloadable!] (restricted)