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Strategic Trade Policy and Signalling with Unobservable Costs

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  • Donald Wright

Abstract

A two-period simultaneous signalling model is developed in which first period outputs not only signal a firm's cost to its competitor, but also signal its costs to a home country government. It is shown that the existence of second period home country strategic trade policy increases the incentives that both home and foreign high-cost firms have to misrepresent themselves as low cost. As a result, in the unique separating sequential equilibrium of this signalling game, second period strategic trade policy induces low-cost firms to distort their first period outputs more than otherwise. The major implication of this result is that the existence of second strategic trade policy can reduce welfare.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 95/6.

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Handle: RePEc:yor:yorken:95/6

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Cited by:
  1. Gasmi, Farid & Malin, Eric & Tandé, François, 2004. "Lobbying in Antidumping," IDEI Working Papers 320, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Bouët, Antoine & Cassagnard, Patrice, 2013. "Strategic trade policy under asymmetric information with screening," Economic Modelling, Elsevier, vol. 32(C), pages 286-293.
  3. Matloob Piracha, 2004. "Export Subsidies and Countervailing Duties Under Asymmetric Information," Studies in Economics, Department of Economics, University of Kent 0410, Department of Economics, University of Kent.
  4. Sun, Ning & Yao, Hongxin, 2011. "Manipulable behavior in international trade," Economic Modelling, Elsevier, vol. 28(1-2), pages 60-66, January.
  5. Sonali Deraniyagala & Ben Fine, 2000. "New Trade Theory Versus Old Trade Policy: A Continuing Enigma," Working Papers 102, Department of Economics, SOAS, University of London, UK.

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