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Tariffs with private information and reputation

  • Jensen, Richard
  • Thursby, Marie

When governments choose trade policy, rarely do they have complete information, At the time decisions are made, policy makers have only estimates of market responses, as well as the responses of foreign governments. In many realistic situations, even the policy objectives of other governments may not be known. For example, the balance of constitutional powers in the United States is often cited as a source of confusion as to objectives of U.S. trade policy. In this paper we examine the Bayesian Nash equilibria of several noncooperative tariff games with incomplete information, In the models examined, the home country has private information about whether its government is a low or high tariff type. If the foreign government is uncertain about this type in a one-shot game, its Nash equilibrium tariff will be lower (higher) than if it knew the home government were a low (high) tariff type. In two multistage games, misleading behavior by the home government is shown to be an equilibrium strategy for sufficiently high discount factors. Whether the uncertainty is persistent or can be resolved is shown to be important for welfare results in the multistage setting. In the models examined, tariff rules do not necessarily dominate discretionary policy.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 29 (1990)
Issue (Month): 1-2 (August)
Pages: 43-67

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Handle: RePEc:eee:inecon:v:29:y:1990:i:1-2:p:43-67
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  2. Feenstra, Robert C, 1987. " Incentive Compatible Trade Policies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 89(3), pages 373-87.
  3. Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Riezman, Raymond G., 1990. "Dynamic Tariffs with Asymmetric Information," Working Papers 720, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. 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.
  6. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
  7. Thursby, Marie & Jensen, Richard, 1983. "A conjectural variation approach to strategic tariff equilibria," Journal of International Economics, Elsevier, vol. 14(1-2), pages 145-161, February.
  8. Robert W. Staiger & Guido Tabellini, 1988. "Rules and Discretion in Trade Policy," NBER Working Papers 2658, National Bureau of Economic Research, Inc.
  9. Young, Leslie & Anderson, James E, 1980. "The Optimal Policies for Restricting Trade under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 47(5), pages 927-32, October.
  10. Stockman, Alan C. & Dellas, Harris, 1986. "Asset markets, tariffs, and political risk," Journal of International Economics, Elsevier, vol. 21(3-4), pages 199-213, November.
  11. Cassing, J H & Hillman, A L & Long, N V, 1986. "Risk Aversion, Terms of Trade Uncertainty and Social-Consensus Trade Policy," Oxford Economic Papers, Oxford University Press, vol. 38(2), pages 234-42, July.
  12. Anderson, James E. & Young, Leslie, 1982. "The optimality of tariff quotas under uncertainty," Journal of International Economics, Elsevier, vol. 13(3-4), pages 337-351, November.
  13. Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 258-72, May.
  14. Rosenthal, R W, 1979. "Sequences of Games with Varying Opponents," Econometrica, Econometric Society, vol. 47(6), pages 1353-66, November.
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