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Sensitivity of Tariffs and Quotas: A Signaling Game

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  • Mohd Amin

    (Columbia University)

Abstract

In a model with cost-based informational asymmetry and trade policy determined endogenously, we show that tariffs and import-quotas have different sensitivities to the signal sent by the private agents to the home government. Specifically, the optimal quota is shown to be more sensitive than the optimal tariff as measured in terms of the reduction in equilibrium import-volume caused by the change in the government's perception about the true cost of the domestic firm. Consequently, signaling distortion is larger in the quota regime than in the tariff regime. Non-equivalence between the two policy tools follows from this difference in their sensitivities. The model is benchmarked so that under complete information tariffs and quotas are equivalent.

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File URL: http://128.118.178.162/eps/it/papers/0401/0401003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 0401003.

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Length: 30 pages
Date of creation: 22 Jan 2004
Date of revision:
Handle: RePEc:wpa:wuwpit:0401003

Note: Type of Document - sensitivity-effect.pdf; prepared on Win98; to print on Letter; pages: 30; figures: None. None
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Web page: http://128.118.178.162

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Keywords: Trade Policy; Singnaling;

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  1. S. Lael Brainard & David Martimort, 1992. "Strategic Trade Policy With Incompletely Informed Policymakers," NBER Working Papers 4069, National Bureau of Economic Research, Inc.
  2. Kyle Bagwell, 1990. "Optimal Export Policy for a New-Product Monopoly," Discussion Papers 898, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Bagwell, Kyle & Staiger, Robert W., 2003. "Informational aspects of foreign direct investment and the multinational firm," Japan and the World Economy, Elsevier, vol. 15(1), pages 1-20, January.
  4. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. Qui, Larry D., 1994. "Optimal strategic trade policy under asymmetric information," Journal of International Economics, Elsevier, vol. 36(3-4), pages 333-354, May.
  6. Itoh, Motoshige & Ono, Yoshiyasu, 1984. "Tariffs vs. quotas under duopoly of heterogeneous goods," Journal of International Economics, Elsevier, vol. 17(3-4), pages 359-373, November.
  7. Herander, Mark G & Kamp, Brad, 1999. "Tariff Policy and Entry with Cost-Based Informational Asymmetries," Economic Inquiry, Western Economic Association International, vol. 37(1), pages 60-73, January.
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