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Tariffs with Private Information and Reputation

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  • Richard A. Jensen
  • Marie Thursby

Abstract

When governments choose trade policy, rarely do they have complete information, At the time decisions are made, policy makers have only estimates of market responses, as well as the responses of foreign governments. In many realistic situations, even the policy objectives of other governments may not be known. For example, the balance of constitutional powers in the United States is often cited as a source of confusion as to objectives of U.S. trade policy. In this paper we examine the Bayesian Nash equilibria of several noncooperative tariff games with incomplete information, In the models examined, the home country has private information about whether its government is a low or high tariff type. If the foreign government is uncertain about this type in a one-shot game, its Nash equilibrium tariff will be lower (higher) than if it knew the home government were a low (high) tariff type. In two multistage games, misleading behavior by the home government is shown to be an equilibrium strategy for sufficiently high discount factors. Whether the uncertainty is persistent or can be resolved is shown to be important for welfare results in the multistage setting. In the models examined, tariff rules do not necessarily dominate discretionary policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2959.

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Date of creation: Nov 1990
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Publication status: published as Journal of International Economics, Vol. 29, pp. 43-67, (1990).
Handle: RePEc:nbr:nberwo:2959

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  1. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  2. Anderson, James E. & Young, Leslie, 1982. "The optimality of tariff quotas under uncertainty," Journal of International Economics, Elsevier, Elsevier, vol. 13(3-4), pages 337-351, November.
  3. repec:fth:stanho:e-88-39 is not listed on IDEAS
  4. Riezman, Raymond, 1991. "Dynamic tariffs with asymmetric information," Journal of International Economics, Elsevier, Elsevier, vol. 30(3-4), pages 267-283, May.
  5. Thursby, Marie & Jensen, Richard, 1983. "A conjectural variation approach to strategic tariff equilibria," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 145-161, February.
  6. Jonathan Eaton & Gene M. Grossman, 1981. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," NBER Working Papers 0797, National Bureau of Economic Research, Inc.
  7. Robert W. Staiger & Guido Tabellini, 1988. "Rules and Discretion in Trade Policy," NBER Working Papers 2658, National Bureau of Economic Research, Inc.
  8. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, American Economic Association, vol. 80(4), pages 779-95, September.
  9. Stockman, Alan C. & Dellas, Harris, 1986. "Asset markets, tariffs, and political risk," Journal of International Economics, Elsevier, Elsevier, vol. 21(3-4), pages 199-213, November.
  10. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, American Economic Association, vol. 74(5), pages 970-85, December.
  11. Feenstra, Robert C, 1987. " Incentive Compatible Trade Policies," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 89(3), pages 373-87.
  12. Rosenthal, R W, 1979. "Sequences of Games with Varying Opponents," Econometrica, Econometric Society, Econometric Society, vol. 47(6), pages 1353-66, November.
  13. Young, Leslie & Anderson, James E, 1980. "The Optimal Policies for Restricting Trade under Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(5), pages 927-32, October.
  14. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1287-307, November.
  15. Cassing, J H & Hillman, A L & Long, N V, 1986. "Risk Aversion, Terms of Trade Uncertainty and Social-Consensus Trade Policy," Oxford Economic Papers, Oxford University Press, vol. 38(2), pages 234-42, July.
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Cited by:
  1. Stahl, Dale O. & Turunen-Red, Arja H., 1995. "Tariff games: Cooperation with random variation in political regimes," European Journal of Political Economy, Elsevier, Elsevier, vol. 11(2), pages 215-238, June.
  2. Feestra, R.C. & Lewis, T.R. & Mcmillan, J., 1989. "Designing Policies To Open Trade," Papers, California Davis - Institute of Governmental Affairs 349, California Davis - Institute of Governmental Affairs.
  3. Bac, Mehmet & Raff, Horst, 1997. "A theory of trade concessions," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 483-504, May.
  4. McCalman, Phillip, 2002. "Multi-lateral trade negotiations and the Most Favored Nation clause," Journal of International Economics, Elsevier, Elsevier, vol. 57(1), pages 151-176, June.
  5. Frederick W. Mayer, 1991. "Domestic politics and the strategy of international trade," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 10(2), pages 222-246.
  6. Kent Kimbrough, 2008. "Optimal Taxes and Tariffs with Private Information," Open Economies Review, Springer, Springer, vol. 19(4), pages 411-422, September.
  7. Lee, Gea M., 2007. "Trade agreements with domestic policies as disguised protection," Journal of International Economics, Elsevier, Elsevier, vol. 71(1), pages 241-259, March.

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