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Distributing The Gains From Trade With Incomplete Information

  • Robert C. Feenstra
  • Tracy R. Lewis

We argue that the incomplete information which the government has about domestic agents means that tariffs become an optimal instrument to protect them from import competition. Using a model where agents have private information about their endowments, we solve for the optimal government policy subject to the political constraint of ensuring Pareto gains from trade, the incentive compatibility constraint, and the government's budget constraint. We find that the optimal policy takes the form of nonlinear tariffs. These tariffs are never complete, in the sense of bringing prices back to their initial level, but always allow some individuals to be strictly better off than at the initial prices. Copyright 1991 Blackwell Publishers Ltd..

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Article provided by Wiley Blackwell in its journal Economics & Politics.

Volume (Year): 3 (1991)
Issue (Month): 1 (03)
Pages: 21-39

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Handle: RePEc:bla:ecopol:v:3:y:1991:i:1:p:21-39
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  1. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
  2. Cassing, James H. & Hillman, Arye L., 1985. "Political influence motives and the choice between tariffs and quotas," Journal of International Economics, Elsevier, vol. 19(3-4), pages 279-290, November.
  3. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
  4. Robert C. Feenstra & Jagdish N. Bhagwati, 1982. "Tariff Seeking and the Efficient Tariff," NBER Chapters, in: Import Competition and Response, pages 245-262 National Bureau of Economic Research, Inc.
  5. Lewis, T.R. & Ware, R. & Feenstra, R., 1988. "Eliminating Price Supports: A Political Economy Perspective," Papers 319, California Davis - Institute of Governmental Affairs.
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