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Sustaining Free Trade with Imperfect Private Information about Non-Tariff Barriers

  • Jee-Hyeong Park
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    This paper examines the issue of sustaining free trade when countries receive imperfect private information about each other’s non-tariff barriers. Because the countries can misrepresent their private belief about other countries’ protection levels, the punishment scheme to deter deviations from free trade should provide right incentives for the countries to elicit the true private information. This incentive constraint (ICP) restricts the length of punishment phases. If the private information is almost perfect, the ICP is not a binding constraint for symmetric countries in sustaining symmetric cooperation. However, the ICP does become a binding constraint if there exists a large enough asymmetry in the countries’ incentives to deviate from free trade, or if there exists a large enough asymmetry in the transparency of countries’ trade policies. Then, a mechanism that publicizes the information about non-tariff barriers, like Trade Policy Review Mechanism (TPRM) of WTO, can play a positive role in restoring cooperation by relaxing the ICP.

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    File URL: http://repec.org/esFEAM04/up.8775.1080753256.pdf
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    Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 736.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:feam04:736
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    1. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
    2. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine.
    3. Staiger, Robert W., 1995. "International rules and institutions for trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 29, pages 1495-1551 Elsevier.
    4. Park, Jee-Hyeong, 2000. "International trade agreements between countries of asymmetric size," Journal of International Economics, Elsevier, vol. 50(2), pages 473-495, April.
    5. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
    6. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," Discussion Papers 1150, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Kandori, Michihiro, 1992. "The Use of Information in Repeated Games with Imperfect Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 581-93, July.
    8. Fudenberg, Drew & Levine, David K., 1991. "An approximate folk theorem with imperfect private information," Journal of Economic Theory, Elsevier, vol. 54(1), pages 26-47, June.
    9. Susan Athey & Kyle Bagwell, 1999. "Optimal Collusion with Private Information," Working papers 99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
    11. Riezman, Raymond, 1991. "Dynamic tariffs with asymmetric information," Journal of International Economics, Elsevier, vol. 30(3-4), pages 267-283, May.
    12. Ludema, Rodney D., 2001. "Optimal international trade agreements and dispute settlement procedures," European Journal of Political Economy, Elsevier, vol. 17(2), pages 355-376, June.
    13. Sekiguchi, Tadashi, 1997. "Efficiency in Repeated Prisoner's Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 76(2), pages 345-361, October.
    14. Radner, Roy, 1986. "Repeated Partnership Games with Imperfect Monitoring and No Discounting," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 43-57, January.
    15. Kennan, John & Riezman, Raymond, 1988. "Do Big Countries Win Tariff Wars?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 81-85, February.
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