This paper explores the role of information in the formulation of trade policy for home and foreign country, in a setting in which the home government chooses its subsidy level first after which the foreign firm retaliates by imposing tariffs on its imports. We consider an environment in which home firm costs are private information but it can signal these costs to both policymakers and the foreign firm by choosing the appropriate output level. We show that a low-cost home firm has an incentive to misrepresent itself as high-cost. This is understood by the foreign firm and both policymakers and results in the home government setting a higher subsidy in the signalling case compared to the case when the home firm's output was not a signal of its costs; the foreign government sets the same tariff in both cases.
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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number
0410.
Length: Date of creation: Sep 2004 Date of revision: Handle: RePEc:ukc:ukcedp:0410
Contact details of provider: Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP Phone: +44 (0)1227 764000 Fax: +44 (0)1227 827850 Web page: http://www.ukc.ac.uk/economics/
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Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
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