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A theory of dynamic tariff and quota retaliation

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  • Naqvi, Nadeem

Abstract

This paper establishes relationships between static Nash equilibria and dynamic Markov perfect equilibria of tariff and quota retaliation games. In supermodular games where tariffs are strategic complements, the steady state of every, symmetric Markov perfect equilibrium must have lower tariffs than in the static equilibrium. If tariffs are strategic substitutes, tariffs in the dynamic game are higher than in the static equilibrium. The supermodular case is extended to quota competition. Instead of the well-known non-equivalence between tariff and quota retaliation outcomes under complete myopia, in some circumstances, free trade can be supported in the steady state of a Markov perfect equilibrium, regardless of whether policies employed are quotas or tariffs. We reach the conclusion that the effect of introducing dynamics crucially depends on whether the policy instruments employed by the countries are strategic substitutes or complements irrespective of whether they are tariffs or quotas.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27656.

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Date of creation: 23 Dec 2010
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Handle: RePEc:pra:mprapa:27656

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Keywords: Foreign trade policy; Tariff; Quota; Retaliation; Dynamic Game; Markov perfect equilibrium; Supermodular games;

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  1. Dana, Rose-Anne & Montrucchio, Luigi, 1986. "Dynamic complexity in duopoly games," Journal of Economic Theory, Elsevier, vol. 40(1), pages 40-56, October.
  2. Taiji Furusawa, 2004. "Threats and Promises in Tariff Setting," Econometric Society 2004 Far Eastern Meetings 635, Econometric Society.
  3. Ausubel, Lawrence M & Deneckere, Raymond J, 1993. "A Generalized Theorem of the Maximum," Economic Theory, Springer, vol. 3(1), pages 99-107, January.
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