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Strategic trade policy under asymmetric information with screening

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  • Bouët, Antoine
  • Cassagnard, Patrice

Abstract

The design of strategic rent-extracting trade policies requires information that may be private, such as the cost structure of an industry or parameters of the demand function. As a consequence, under asymmetric information, the design of these policies is problematic. We propose screening menus consisting of different instruments (tariff vs. quota) designed to solve this informational issue. We first use a simple model that examines a Cournot duopoly between a domestic firm and a foreign firm with linear demand and cost functions, with both firms supplying a homogeneous good on the domestic market. In this scenario, if the government does not have information regarding the demand parameter, which is known by both firms, a menu consisting of a rent-extracting tariff for a low demand parameter and a rent-extracting quota for a high demand parameter maximizes the government's objective function. This menu leads the domestic firm to reveal private information. We then generalize this framework to a scenario with imperfect information regarding the firms' marginal cost. Finally, we discuss the issue of quotas generating public revenues and study the case of a menu consisting of a tariff and a free quota.

Suggested Citation

  • Bouët, Antoine & Cassagnard, Patrice, 2013. "Strategic trade policy under asymmetric information with screening," Economic Modelling, Elsevier, vol. 32(C), pages 286-293.
  • Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:286-293
    DOI: 10.1016/j.econmod.2013.02.024
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    References listed on IDEAS

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    1. repec:eee:ecmode:v:68:y:2018:i:c:p:450-460 is not listed on IDEAS
    2. Countryman, Amanda M. & Narayanan, Badri G., 2017. "Price volatility, tariff structure and the special safeguard mechanism," Economic Modelling, Elsevier, vol. 64(C), pages 399-408.
    3. Berthoumieu, Julien & Bouët, Antoine, 2015. "The impact of “At-the-Border†and “Behind-the-Border†policies on cost-reducing research and development:," IFPRI discussion papers 1425, International Food Policy Research Institute (IFPRI).

    More about this item

    Keywords

    Cournot duopoly; International trade; Adverse selection; Screening;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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