Endogenous Choice of Trade Instrument Under Uncertainty
This paper endogenizes the choice between import tariffs and quotas of two policy active countries in a duopsonistic world market. Without uncertainty, import quotas are welfare superior to import tariffs in equilibrium. If two importers can precommit to a type of instrument before deciding the level of the instrument to use in a future period, an import quota equilibrium emerges. We introduce asymmetric risk in the import demand schedule of the two importers. There exists a range of parameters in which a mixed equilibrium emerges; i.e. one country uses a tariff while the other restricts trade with an import quota. The likelihood that both importers choose a different trade instrument in equilibrium is increasing with the correlation coefficient of the two random shocks.
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|Date of creation:||01 Jan 2002|
|Publication status:||Published in International Economic Journal 2002, vol. 16 no. 4|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
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Web page: http://www.econ.iastate.edu
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- Falvey, Rodney E & Lloyd, P J, 1991. "Uncertainty and the Choice of Protective Instrument," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 463-478, July.
- Copeland, Brian R & Tower, Edward & Webb, Michael A, 1989. "On Negotiated Quotas, Tariffs, and Transfers," Oxford Economic Papers, Oxford University Press, vol. 41(4), pages 774-788, October.
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