We consider a duopolistic trade model where a tariff induces "more efficient" foreign firm to transfer its technology to the "less efficient" domestic firm. Contrary to the conventional wisdom, such a tariff raises consumers' surplus relative to the free-trade situation. Later under linear demand assumption we completely characterize the optimal tariff in this context. Possibility of technology transfer reduces the optimal tariff rate relative to the usual level.
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Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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