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Rules and Discretion in Trade Policy

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Author Info
Robert W. Staiger
Guido Tabellini

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Abstract

We argue in this paper that the second-best nature of trade-policy intervention makes it likely that the issue of time consistency viii be an important consideration in determining both the extent and the efficacy of such intervention in most environments. The point is seen most directly by noting that a tariff is both a tax on consumers and a subsidy to producers of the import-competing good. Since first-best intervention typically calls for targeting each distortion with a separate tax/subsidy, the tariff will be a more effective policy tool if its consumption tax aspect can be separated from its production subsidy dimension. Consequently, if production decisions are made prior to consumption decisions, a government with sufficient policy flexibility will be tempted to surprise producers with policies other than those announced in an effort to make this separation. This leads optimal trade policy intervention to be time-inconsistent in a wide range of environments. We explore this idea in general terms and illustrate the results with specific examples.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2658.

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Date of creation: Jul 1988
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Handle: RePEc:nbr:nberwo:2658

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, vol. 23(3-4), pages 201-220, November. [Downloadable!] (restricted)
  2. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-37, December. [Downloadable!] (restricted)
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Simon Schropp, 2007. "Revisiting the "Compliance-vs.-Rebalancing" Debate in WTO Scholarship a Unified Research Agenda," HEI Working Papers 29-2007, Economics Section, The Graduate Institute of International Studies, revised Dec 2007. [Downloadable!]
  2. Kyle Bagwell & Robert W. Staiger, 2000. "GATT-Think," NBER Working Papers 8005, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Kyle Bagwell & Robert W. Staiger, 2002. "GATT-think," Discussion Papers 0102-39, Columbia University, Department of Economics. [Downloadable!]
  3. Harry Flam & Robert W. Staiger, 1989. "Adverse Selection in Credit Markets and Infant Industry Protection," NBER Working Papers 2864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Pao-Li Chang & Myoung-Jae Lee, 2007. "The WTO Trade Effect," Working Papers 06-2007, Singapore Management University, School of Economics. [Downloadable!]
  5. Peter Welzel, 1992. "A note on the time inconsistency of strategic trade policy," Open Economies Review, Springer, vol. 3(2), pages 203-214, June. [Downloadable!] (restricted)
  6. repec:bep:eapadv:v:4:y:2004:i:2:p:1331-1331 is not listed on IDEAS
    Other versions:
  7. Richard A. Jensen & Marie Thursby, 1990. "Tariffs with Private Information and Reputation," NBER Working Papers 2959, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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