The Myth of Profit-Shifting Trade Policies

Onur Koska and Frank Stähler

No 1511, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: Since Dixit (1984), it is well accepted that a home country's best policy is to ban imports in an oligopolistic market if the resulting monopoly has a cost advantage over imports. This note (i) provides a formal proof and (ii) extends this result to symmetric firms. When domestic instruments are available, the optimal policy in a non-cooperative game is to subsidize local production such that it completely replaces imports. This policy is also globally first-best.

Keywords: Import tariffs; Export subsidies; Profit shifting (search for similar items in EconPapers)
JEL-codes: F13 (search for similar items in EconPapers)
Pages: 7 pages
Date: 2015-12, Revised 2015-12
New Economics Papers: this item is included in nep-int
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http://erc.metu.edu.tr/en/system/files/menu/series15/1511.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: The myth of profit-shifting trade policies (2016)
Working Paper: The Myth of Profit-Shifting Trade Policies (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1511

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