Contingent Trade Policy and Economic Efficiency
AbstractThis paper develops an efficiency theory of contingent trade policies. We model the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete information about production costs. The cost distributions are asymmetric because the foreign firm incurs a trade cost to serve the domestic market. We show that the foreign firm prices more aggressively to overcome its cost disadvantage. This creates the possibility of an inefficient allocation, justifying the use of contingent trade policy on efficiency grounds. Despite an environment of asymmetric information, contingent trade policy that seeks to maximize global welfare can be designed to avoid the potential inefficiency. National governments, on the other hand, make excessive use of contingent trade policy due to rent shifting motives. The expected inefficiency of national policy is larger (smaller) for low (high) trade costs compared to the laissez-faire case. In general, there is no clear ranking between the laissez-faire outcome and a contingent national trade policy
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1853.
Length: 36 pages
Date of creation: Jul 2013
Date of revision:
Contingent Trade Policy; Efficiency;
Other versions of this item:
- Phillip McCALMAN & Frank STÄHLER & Gerald WILLMANN, 2011. "Contingent trade policy and economic efficiency," Center for Economic Studies - Discussion papers ces11.05, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Phillip McCalman & Frank Stähler & Gerald Willmann, 2011. "Contingent Trade Policy and Economic Efficiency," CESifo Working Paper Series 3424, CESifo Group Munich.
- McCalman, Phillip & Stähler, Frank & Willmann, Gerald, 2011. "Contingent trade policy and economic efficiency," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/305753, Katholieke Universiteit Leuven.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-05 (All new papers)
- NEP-CTA-2013-08-05 (Contract Theory & Applications)
- NEP-INT-2013-08-05 (International Trade)
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