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Trade Policy Under Asymmetric Information

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  • Lapan, Harvey E.
  • Melkonian, Tigran A.

Abstract

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p3811-2002-09-19.pdf
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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10026.

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Date of creation: 19 Sep 2002
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Handle: RePEc:isu:genres:10026

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. Collie, David & Hviid, Morten, 1994. "Tariffs for a foreign monopolist under incomplete information," Journal of International Economics, Elsevier, vol. 37(3-4), pages 249-264, November.
  2. Kyle Bagwell & Robert W. Staiger, 1999. "Domestic Policies, National Sovereignty and International Economic Institutions," NBER Working Papers 7293, National Bureau of Economic Research, Inc.
  3. Lapan, Harvey E., 1988. "The Optimal Tariff, Production Lags and Time Consistency," Staff General Research Papers 10816, Iowa State University, Department of Economics.
  4. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  5. David Besanko & Daniel F. Spulber, 1992. "Sequential-Equilibrium Investment by Regulated Firms," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 153-170, Summer.
  6. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
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