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Endogenous Choice of Trade Instrument Under Uncertainty

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  • Gervais, Jean-Philippe
  • Lapan, Harvey E.

Abstract

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.

Suggested Citation

  • Gervais, Jean-Philippe & Lapan, Harvey E., 2002. "Endogenous Choice of Trade Instrument Under Uncertainty," Staff General Research Papers Archive 5135, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:5135
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    References listed on IDEAS

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    1. Dasgupta, Partha & Stiglitz, Joseph E, 1977. "Tariffs vs . Quotas as Revenue Raising Devices under Uncertainty," American Economic Review, American Economic Association, vol. 67(5), pages 975-981, December.
    2. Karp, Larry & Newbery, David M., 1991. "Optimal tariffs on exhaustible resources," Journal of International Economics, Elsevier, vol. 30(3-4), pages 285-299, May.
    3. Leslie Young & James E. Anderson, 1982. "Risk Aversion and Optimal Trade Restrictions," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 291-305.
    4. Jean-Philippe Gervais & Harvey E. Lapan, 2001. "Optimal Production Tax and Quota under Time Consistent Trade Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 921-933.
    5. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    6. Bergstrom, Theodore C, 1982. "On Capturing Oil Rents with a National Excise Tax," American Economic Review, American Economic Association, vol. 72(1), pages 194-201, March.
    7. Fishelson, Gideon & Flatters, Frank, 1975. "The (non)equivalence of optimal tariffs and quotas under uncertainty," Journal of International Economics, Elsevier, vol. 5(4), pages 385-393, November.
    8. 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.
    9. 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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    Cited by:

    1. Abbassi, Abdessalem & Tamini, Lota D. & Dakhlaoui, Ahlem, 2015. "Import quota allocation between regions under Cournot competition," Economic Modelling, Elsevier, vol. 51(C), pages 484-490.

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