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Tariffs vs Quotas in a Model of Trade with Capital Accumulation

  • G. Calzolari
  • L. Lambertini

This paper examines the equivalence among price-modifying and quantity-fixing international trade policies in a differential game. We employ two well-known capital accumulation dynamics for firms, due to Nerlove and Arrow and to Ramsey, respectively. We show that, in both cases, open-loop and closed-loop Nash equilibria coincide. Under the former accumulation the tariff-quota equivalence holds, while, in general, it does not under the latter. Moreover, in the Ramsey model, the country setting the trade policy (weakly) prefers a quantity-equivalent import quota to the adoption of the tariff. These results are not a consequence of the equilibrium concept we adopt (with and without market power), but directly follow from the interplay between market power and the properties of accumulation dynamics. Copyright � 2006 The Authors; Journal compilation � 2006 Blackwell Publishing Ltd.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 392.

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Date of creation: 2000
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Handle: RePEc:bol:bodewp:392
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  1. Robert Driskill & Stephen McCafferty, 1989. "Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations," NBER Chapters, in: Trade Policies for International Competitiveness, pages 125-144 National Bureau of Economic Research, Inc.
  2. Fershtman, Chaim & Muller, Eitan, 1984. "Capital accumulation games of infinite duration," Journal of Economic Theory, Elsevier, vol. 33(2), pages 322-339, August.
  3. Engelbert J. Dockner & Alfred A. Haug, 1991. "The Closed-Loop Motive for Voluntary Export Restraints," Canadian Journal of Economics, Canadian Economics Association, vol. 24(3), pages 679-85, August.
  4. Richard Harris, 1985. "Why Voluntary Export Restraints Are 'Voluntary.'," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 799-809, November.
  5. R. Cellini & L. Lambertini, 2000. "Non-Linear Marcket Demand and Capital Accumulation in A Differential Oligopoly Game," Working Papers 372, Dipartimento Scienze Economiche, Universita' di Bologna.
  6. Cheng, Leonard K, 1987. "Optimal Trade and Technology Policies: Dynamic Linkages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 757-76, October.
  7. Dockner, Engelbert J. & Haug, Alfred A., 1990. "Tariffs and quotas under dynamic duopolistic competition," Journal of International Economics, Elsevier, vol. 29(1-2), pages 147-159, August.
  8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  9. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  10. Sweeney, Richard J. & Tower, Edward & Willett, Thomas D., 1977. "The ranking of alternative tariff and quota policies in the presence of domestic monopoly," Journal of International Economics, Elsevier, vol. 7(4), pages 349-362, November.
  11. Driskill, Robert A. & McCafferty, Stephen, 1989. "Dynamic duopoly with adjustment costs: A differential game approach," Journal of Economic Theory, Elsevier, vol. 49(2), pages 324-338, December.
  12. Robert C. Feenstra, 1989. "Trade Policies for International Competitiveness," NBER Books, National Bureau of Economic Research, Inc, number feen89-1, September.
  13. Cellini, Roberto & Lambertini, Luca, 1998. "A Dynamic Model of Differentiated Oligopoly with Capital Accumulation," Journal of Economic Theory, Elsevier, vol. 83(1), pages 145-155, November.
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