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Time-Consistent Protection with Learning by Doing

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  • Miravete, Eugenio

Abstract

Can a government induce efficiency gains in domestic industry by protecting it against foreign competition? Would such trade protection be time-consistent? The present Paper builds a dynamic equilibrium model that accounts for learning-by-doing effects that link firms' strategies over time. The model shows that the existence of dynamic economies of scale suffices to overcome the traditional government's lack of commitment to its tariff policy. This Paper compares the infinite horizon Markov Perfect Equilibria of this game with the dynamic equilibrium under commitment as well as the static Nash equilibrium. Equilibrium strategies are derived in closed form by solving a linear-quadratic differential game. Optimal trade policy involves higher tariff levels than in the static setup in order to account for future gains in efficiency.

Suggested Citation

  • Miravete, Eugenio, 2001. "Time-Consistent Protection with Learning by Doing," CEPR Discussion Papers 2937, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2937
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    Cited by:

    1. Vives, Xavier & Jun, Byoung, 2001. "Incentives in Dynamic Duopoly," CEPR Discussion Papers 2899, C.E.P.R. Discussion Papers.
    2. Bläsi, Albrecht & Requate, Till, 2005. "Learning-by-Doing with Spillovers in Competitive Industries, Free Entry, and Regulatory Policy," Economics Working Papers 2005-09, Christian-Albrechts-University of Kiel, Department of Economics.
    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.
    4. Vladimir Petkov, 2007. "Infant Firm Subsidization in Industries with Dynamic Structure," Journal of Industry, Competition and Trade, Springer, vol. 7(2), pages 73-93, June.
    5. Siebert Ralph B, 2010. "Learning-by-Doing and Cannibalization Effects at Multi-Vintage Firms: Evidence from the Semiconductor Industry," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-32, May.
    6. Miravete, Eugenio J., 2003. "Time-consistent protection with learning by doing," European Economic Review, Elsevier, vol. 47(5), pages 761-790, October.
    7. Karim El Mokri, 2016. "Morocco’s 2014- 2020 Industrial Strategy and its potential implications for the structural transformation process," Policy notes & Policy briefs 1628, Policy Center for the New South.
    8. Kogan, Konstantin & El Ouardighi, Fouad & Herbon, Avi, 2017. "Production with learning and forgetting in a competitive environment," International Journal of Production Economics, Elsevier, vol. 189(C), pages 52-62.
    9. Koji Kotani & Makoto Kakinaka, 2017. "Some implications of environmental regulation on social welfare under learning-by-doing of eco-products," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 19(1), pages 121-149, January.
    10. Saure, Philip, 2007. "Revisiting the infant industry argument," Journal of Development Economics, Elsevier, vol. 84(1), pages 104-117, September.
    11. Steffen Jørgensen & Georges Zaccour, 2007. "Developments in differential game theory and numerical methods: economic and management applications," Computational Management Science, Springer, vol. 4(2), pages 159-181, April.
    12. Delia Baghdasaryan & Krešimir Žigić, 2010. "Tariffs, market conduct and government commitment," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(1), pages 91-122, January.
    13. Greetje Everaert, 2003. "Technology Adoption under Price Undertakings," LICOS Discussion Papers 13703, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    14. Calzolari, Giacomo & Lambertini, Luca, 2007. "Export restraints in a model of trade with capital accumulation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3822-3842, December.
    15. Dijkstra, Bouwe R., 2007. "An investment contest to influence environmental policy," Resource and Energy Economics, Elsevier, vol. 29(4), pages 300-324, November.
    16. Makoto Kakinaka & Koji Kotani, 2006. "Promotion of Eco-Products and Environmental Regulation with Learning-by-Doing," Working Papers EMS_2006_07, Research Institute, International University of Japan.
    17. Agnieszka Hajdukiewicz & Bożena Pera, 2020. "International Trade Disputes over Renewable Energy—the Case of the Solar Photovoltaic Sector," Energies, MDPI, vol. 13(2), pages 1-23, January.
    18. 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.

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    More about this item

    Keywords

    Infant-industry; Tariff protection; Infinite horizon markov perfect equilibria; Linear-quadratic differential game;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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