This paper endogenizes the choice between import tariffs and quotas of two policy active countries in a duopsonistic world market. Without uncertainty, import quotas are welfare superior to import tariffs in equilibrium. If two importers can precommit to a type of instrument before deciding the level of the instrument to use in a future period, an import quota equilibrium emerges. We introduce asymmetric risk in the import demand schedule of the two importers. There exists a range of parameters in which a mixed equilibrium emerges; i.e. one country uses a tariff while the other restricts trade with an import quota. The likelihood that both importers choose a different trade instrument in equilibrium is increasing with the correlation coefficient of the two random shocks.
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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
5135.
Length: Date of creation: 01 Mar 2002 Date of revision: Publication status: Published in International Economic Journal, 2002, Vol. 16, No. 4. Handle: RePEc:isu:genres:5135
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