Incentives, Protection, and Time Consistency

Donald Wright

Canadian Journal of Economics, 1995, vol. 28, issue 4a, 929-38

Abstract: On the assumption that firm effort and costs are publicly observable, it is shown that a policy of future tariff removal is time inconsistent. As a result, less cost-reducing effort is undertaken by the firm than would be optimal under credible commitment. The introduction of asymmetric information has two offsetting effects on expected welfare: it decreases welfare because tariffs can no longer be contingent on the cost state and it increases welfare because it induces more cost-reducing effort.

Date: 1995
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