Free Trade versus Strategic Trade as a Choice Between Two 'Second-best' Policies: A Symmetric versus Asymmetric Information Ana

Kresimir Zigic () and Delia Ionascu

No 2928, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this Paper, we analyse the following policy dilemma: strategic trade policy versus free trade when the domestic government is bound to intervene only after the domestic firm's strategic variable is chosen. This intervention allows the domestic firm to manipulate the domestic government and results in a socially inefficient choice of the strategic variable. Commitment to free trade leads, however, to foregoing the benefits from profit shifting. Yet, from the social point of view, free trade may be optimal even under the assumption of symmetric information. Due to costly signalling, this result is reinforced in the case of asymmetric information.

Keywords: Strategic trade policy; Free trade; First-best versus second-best policy; Government's commitment; Signalling (search for similar items in EconPapers)
JEL-codes: F13 (search for similar items in EconPapers)
Date: 2001-08
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