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Optimal tariffs, tariff jumping, and heterogeneous firms

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  • Matthew T. Cole
  • Ronald B. Davies

Abstract

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.

Suggested Citation

  • Matthew T. Cole & Ronald B. Davies, 2009. "Optimal tariffs, tariff jumping, and heterogeneous firms," Working Papers 200919, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:200919
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    File URL: http://hdl.handle.net/10197/2617
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    References listed on IDEAS

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    2. Bauer, Christian & Davies, Ronald B. & Haufler, Andreas, 2014. "Economic integration and the optimal corporate tax structure with heterogeneous firms," Journal of Public Economics, Elsevier, vol. 110(C), pages 42-56.
    3. Ronald Davies & Lourenço Paz, 2011. "Tariffs versus VAT in the presence of heterogeneous firms and an informal sector," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(5), pages 533-554, October.
    4. Pflüger, Michael P. & Russek, Stephan, 2010. "Trade and Industrial Policies with Heterogeneous Firms: The Role of Country Asymmetries," IZA Discussion Papers 5387, Institute for the Study of Labor (IZA).
    5. Bauer, Christian J. & Langenmayr, Dominika, 2013. "Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?," Journal of International Economics, Elsevier, vol. 90(2), pages 326-336.
    6. Anna Bohnstedt, 2013. "Spillovers from Foreign Exporters," Ruhr Economic Papers 0400, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    7. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Journal of International Economics, Elsevier, vol. 89(1), pages 13-25.
    8. Michael Pflüger & Stephan Russek, 2011. "Trade and Industrial Policies with Heterogeneous Firms: The Role of Country Asymmetries," Working Papers 094, Bavarian Graduate Program in Economics (BGPE).
    9. Bohnstedt, Anna, 2013. "Spillovers from Foreign Exporters," Ruhr Economic Papers 400, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    10. Contessi, Silvio, 2010. "Multinational Firms' Entry and Productivity: Some Aggregate Implications of Firm-level Heterogeneity," Working Papers 2010-043, Federal Reserve Bank of St. Louis, revised 26 Aug 2015.
    11. Igor Bagayev & Ronald B. Davies, 2017. "The Impact of Protection on Observed Productivity Distributions," Working Papers 201705, School of Economics, University College Dublin.
    12. Lingens, Jörg & De Pinto, Marco & Bauer, Christian, 2016. "The Impact of Organization Costs when Firm-selection Matters," Annual Conference 2016 (Augsburg): Demographic Change 145620, Verein für Socialpolitik / German Economic Association.
    13. Ronald B. Davies & Benjamin H. Liebman & Kasaundra Tomlin, 2015. "I've Been Everywhere (Except Mexico): Investor Responses to NAFTA's Cross-Border Trucking Provisions," The Institute for International Integration Studies Discussion Paper Series iiisdp467, IIIS.

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    Keywords

    Tariff; International business enterprises; Investments; Foreign;

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