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Distributing the Gains from Trade With Incomplete Information

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  • Robert Feenstra
  • Tracy R. Lewis

Abstract

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.

Suggested Citation

  • Robert Feenstra & Tracy R. Lewis, 1990. "Distributing the Gains from Trade With Incomplete Information," NBER Working Papers 3277, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3277
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    1. 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.
    2. 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.
    3. 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.
    4. Magee,Stephen P. & Brock,William A. & Young,Leslie, 1989. "Black Hole Tariffs and Endogenous Policy Theory," Cambridge Books, Cambridge University Press, number 9780521377003, January.
    5. Robert C. Feenstra & Tracy R. Lewis, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1287-1307.
    6. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-985, December.
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    Cited by:

    1. Feenstra, Robert C. & Lewis, Tracy R., 1994. "Trade adjustment assistance and Pareto gains from trade," Journal of International Economics, Elsevier, vol. 36(3-4), pages 201-222, May.
    2. Wolfgang Mayer & Raymond Riezman, 2013. "Voter Preferences for Trade Policy Instruments," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 11, pages 169-183 World Scientific Publishing Co. Pte. Ltd..
    3. Margarita Katsimi & Thomas Moutos, 2005. "Inequality and Relative Reliance on Tariffs: Theory and Evidence," CESifo Working Paper Series 1457, CESifo Group Munich.
    4. Thierry Verdier, 2005. "Intégration commerciale « socialement responsable » : une approche en termes d'économie politique," Revue d’économie du développement, De Boeck Université, vol. 13(4), pages 55-121.
    5. Anne O. Krueger, 1996. "Introduction to "The Political Economy of American Trade Policy"," NBER Chapters,in: The Political Economy of American Trade Policy, pages 1-10 National Bureau of Economic Research, Inc.
    6. Rodrik, Dani, 1994. "What does the Political Economy Literature on Trade Policy (Not) Tell Us That We Ought to Know?," CEPR Discussion Papers 1039, C.E.P.R. Discussion Papers.
    7. Matthew F. Mitchell & Andrea Moro, 2006. "Persistent Distortionary Policies with Asymmetric Information," American Economic Review, American Economic Association, vol. 96(1), pages 387-393, March.
    8. Limao, Nuno & Panagariya, Arvind, 2007. "Inequality and endogenous trade policy outcomes," Journal of International Economics, Elsevier, vol. 72(2), pages 292-309, July.
    9. Andrea Moro & Matthew F. Mitchell, 2005. "Informationally Efficient Trade Barriers," Public Economics 0503004, University Library of Munich, Germany.

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