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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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    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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