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Tariffs with private information and reputation

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  • Jensen, Richard
  • Thursby, Marie

Abstract

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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Suggested Citation

  • Jensen, Richard & Thursby, Marie, 1990. "Tariffs with private information and reputation," Journal of International Economics, Elsevier, vol. 29(1-2), pages 43-67, August.
  • Handle: RePEc:eee:inecon:v:29:y:1990:i:1-2:p:43-67
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    1. Feestra, R.C. & Lewis, T.R. & Mcmillan, J., 1989. "Designing Policies To Open Trade," Papers 349, California Davis - Institute of Governmental Affairs.
    2. McCalman, Phillip, 2002. "Multi-lateral trade negotiations and the Most Favored Nation clause," Journal of International Economics, Elsevier, vol. 57(1), pages 151-176, June.
    3. Frederick W. Mayer, 1991. "Domestic politics and the strategy of international trade," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 10(2), pages 222-246.
    4. Mathias Herzing, 2011. "Does hidden information make trade liberalization more fragile?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(2), pages 561-579, May.
    5. Kent Kimbrough, 2008. "Optimal Taxes and Tariffs with Private Information," Open Economies Review, Springer, vol. 19(4), pages 411-422, September.
    6. Bac, Mehmet & Raff, Horst, 1997. "A theory of trade concessions," Journal of International Economics, Elsevier, vol. 42(3-4), pages 483-504, May.
    7. Lee, Gea M., 2007. "Trade agreements with domestic policies as disguised protection," Journal of International Economics, Elsevier, vol. 71(1), pages 241-259, March.
    8. Stahl, Dale O. & Turunen-Red, Arja H., 1995. "Tariff games: Cooperation with random variation in political regimes," European Journal of Political Economy, Elsevier, vol. 11(2), pages 215-238, June.

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