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Infant Industry Protection Revisited

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  • Aditya Bhattacharjea

Abstract

In 1791, Alexander Hamilton suggested that assuring protection to domestic entrants Could pre-empt entry-degterrence by foreign firms. This paper reformulates his Argument in game-theoretic terms with asymmetric cost information, imposing the Requirement that both the foreign firm's threat and the home governments's promise of Protection should be credible. It derives a simple optimal tariff formula that depends Only on the expectation of foreign costs. It then shows that this tariff can lead to Welfare-decreasing entry, but only if thee foreign is relatively inefficient. However, If the formula is applied with dynamic consistency, and is rationally anticipated by both foreign and domestic firms, it prevents foreign entry-deterrence and improves deomestic welfare. [F13, 019]

Suggested Citation

  • Aditya Bhattacharjea, 2002. "Infant Industry Protection Revisited," International Economic Journal, Taylor & Francis Journals, vol. 16(3), pages 115-133.
    • Handle: RePEc:taf:intecj:v:16:y:2002:i:3:p:115-133
    DOI: 10.1080/10168730200000024
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    Cited by:

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    2. Delia Ionaºcu & Kresimir Zigic, 2005. "Strategic Tariff Protection, Market Conduct, and Government Commitment Levels in Developing Economies," CERGE-EI Working Papers wp249, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Kresimir Zigic, 2011. "Strategic Interactions in Markets with Innovative Activity: The Cases of Strategic Trade Policy and Market Leadership," CERGE-EI Books, The Center for Economic Research and Graduate Education - Economics Institute, Prague, edition 1, number b06, May.

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