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Optiomal tariff policy with endogenous location choice

Author

Listed:
  • Ohkawa, Takao
  • Okamura, Makoto
  • Okawa, Masayuki

Abstract

This paper examines the optimal tariff policy of an importing country when duopoly firms choose to export or undertake foreign direct investment (FDI). We establish that (i) the government sets its optimal tariff rate to encourage FDI when the fixed cost of FDI is low. Choosing FDI creates a Prisoner's Dilemma for both firms and is not optimal for the source country; and (ii) when the fixed cost of FDI is high, the optimal tariff is set to induce both firms to choose exports.

Suggested Citation

  • Ohkawa, Takao & Okamura, Makoto & Okawa, Masayuki, 2011. "Optiomal tariff policy with endogenous location choice," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 1(3), pages 321-338.
    • Handle: RePEc:gok:ijdcv1:v:1:y:2011:i:3:p:321-338
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    File URL: http://www.worldscientific.com/doi/pdf/10.1142/S2010269011000208
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