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Strategic trade policy under asymmetric information with screening

  • Bouët, Antoine
  • Cassagnard, Patrice

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.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 286-293

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:286-293
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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