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Contingent Trade Policy and Economic Efficiency

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  • Phillip McCalman
  • Frank Stähler
  • Gerald Willmann

Abstract

This 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 Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1853.

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Length: 36 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:kie:kieliw:1853

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Keywords: Contingent Trade Policy; Efficiency;

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References

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  1. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers, Ryerson University, Department of Economics 018, Ryerson University, Department of Economics.
  2. Miyagiwa, Kaz & Ohno, Yuka, 2007. "Dumping as a signal of innovation," Journal of International Economics, Elsevier, Elsevier, vol. 71(1), pages 221-240, March.
  3. Xenia Matschke & Anja Schottner, 2008. "Antidumping as Strategic Trade Policy Under Asymmetric Information," Working papers, University of Connecticut, Department of Economics 2008-19, University of Connecticut, Department of Economics, revised Jan 2010.
  4. Dobrin R. Kolev & Thomas J. Prusa, 2002. "Dumping and Double Crossing: The (In)Effectiveness of Cost-Based Trade Policy under Incomplete Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 895-918, August.
  5. Anderson, James E, 1992. "Domino Dumping, I: Competitive Exporters," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 65-83, March.
  6. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers, Iowa State University, Department of Economics 11375, Iowa State University, Department of Economics.
  7. Robert W. Staiger & Frank A. Wolak, 1990. "The Effect of Domestic Antidumping Law in the Presence of Foreign Monopoly," NBER Working Papers 3254, National Bureau of Economic Research, Inc.
  8. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 100(1), pages 394-419, March.
  9. Ronald D. Fischer & Thomas J. Prusa, 2003. "WTO Exceptions as Insurance," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 11(5), pages 745-757, November.
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Cited by:
  1. Castillo, Leopoldo Laborda & Salem, Daniel Sotelsek & Guasch, Jose Luis, 2012. "Innovative and absorptive capacity of international knowledge : an empirical analysis of productivity sources in Latin American countries," Policy Research Working Paper Series 5931, The World Bank.

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