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Trade Policy Under Asymmetric Information

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Listed:
  • Lapan, Harvey E.
  • Melkonian, Tigran A.

Abstract

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.

Suggested Citation

  • Lapan, Harvey E. & Melkonian, Tigran A., 2002. "Trade Policy Under Asymmetric Information," Staff General Research Papers Archive 10026, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:10026
    as

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    File URL: http://www2.econ.iastate.edu/papers/p3811-2002-09-19.pdf
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    References listed on IDEAS

    as
    1. Collie, David & Hviid, Morten, 1994. "Tariffs for a foreign monopolist under incomplete information," Journal of International Economics, Elsevier, vol. 37(3-4), pages 249-264, November.
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    4. Kyle Bagwell & Robert W. Staiger, 2001. "Domestic Policies, National Sovereignty, and International Economic Institutions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 519-562.
    5. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    6. David Besanko & Daniel F. Spulber, 1992. "Sequential-Equilibrium Investment by Regulated Firms," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 153-170, Summer.
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    JEL classification:

    • F10 - International Economics - - Trade - - - General

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