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Impatience, International Competitiveness, and Political

Listed author(s):
  • Aurora Gómez Galvarriato
  • César L. Guerrero-Luchtenberg
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    In this paper we present a model that describes how historical political constraints by themselves, or in combination with a sufficient degree of impatience, may be the cause of bankruptcy in some industries when a closed economy is opened to foreign competition. The model assesses the behavior of two types of firms, impatient and patient, which may or may not adopt foreign technology. The costs involved are not only economic but also political. These political costs are, nonetheless, measured in monetary terms. At some moment, which depends on the political constraints, a third firm enters the market, the foreign one. Depending on the national firms’ degree of impatience and the costs associated with political constraints, Nash equilibria, in which one or even both firms–at the moment the economy is opened–have to shut down, exist. All these strategies result to be subgame perfect equilibrium. Further, as a by-product, our results shed new light on the topic of temporary protection: The degree of impatience, by itself, my be the reason of why temporary protection may o may not fail to induce firms to adopt advanced technologies, even if the threat of liberalization is credible; furthermore, if both firms are sufficiently patient, both firms adopt the new technology and temporary protection results to be operative in order to maximize social welfare, so this equilibrium pass the “renegotiation-proof” criterium (along the equilibrium path).

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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c010_015.

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    Length: 27 pages
    Date of creation: Jun 2005
    Handle: RePEc:deg:conpap:c010_015
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    1. Matsuyama, Kiminori, 1990. "Perfect Equilibria in a Trade Liberalization Game," American Economic Review, American Economic Association, vol. 80(3), pages 480-492, June.
    2. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, July.
    3. Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 20-43, July.
    4. Donald J. Wright, 1995. "Incentives, Protection, and Time Consistency," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 929-938, November.
    5. Aaron Tornell, 1991. "Time Inconsistency of Protectionist Programs," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 963-974.
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