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Distributing the Gains from Trade With Incomplete Information

  • Robert Feenstra
  • Tracy R. Lewis

We argue that the incomplete information which the government has about domestic agents means that tariffs become an optimal instrument to protect them from import competition. We solve for the optimal government policies. subject to the political constraint of ensuring Pareto gains from trade, the incentive compatibility constraint, and the government's budget constraint. We find that the optimal policies take the form of nonlinear tariffs, so that both buyers and sellers of the import face an effective price which exceeds its world level. We find that the tariffs are never complete, in the sense of bringing prices (or all individuals back to their initial level. Rather, it will always be possible to make some individuals strictly better off than at the initial prices, while ensuring that no persons are worse off.

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File URL: http://www.nber.org/papers/w3277.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3277.

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Date of creation: Mar 1990
Date of revision:
Publication status: published as Economics and Politics, 3(1) March 1991, pp. 21-39
Handle: RePEc:nbr:nberwo:3277
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Cassing, James H. & Hillman, Arye L., 1985. "Political influence motives and the choice between tariffs and quotas," Journal of International Economics, Elsevier, vol. 19(3-4), pages 279-290, November.
  2. Robert C. Feenstra & Jagdish N. Bhagwati, 1982. "Tariff Seeking and the Efficient Tariff," NBER Chapters, in: Import Competition and Response, pages 245-262 National Bureau of Economic Research, Inc.
  3. Lewis, Tracy R. & Feenstra, Robert & Ware, Roger, 1989. "Eliminating price supports : A political economy perspective," Journal of Public Economics, Elsevier, vol. 40(2), pages 159-185, November.
  4. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
  5. Robert C. Feenstra & Tracy R. Lewis, 1987. "Negotiated Trade Restrictions with Private Political Pressure," NBER Working Papers 2374, National Bureau of Economic Research, Inc.
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