Contingent trade policy and economic efficiency

Phillip McCalman, Frank Stähler and Gerald Willmann ()
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Gerald Willmann: University of Bielefeld

Review of World Economics (Weltwirtschaftliches Archiv), 2019, vol. 155, issue 2, No 2, 227-255

Abstract: Abstract This paper models the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete cost information. As the foreign firm incurs a trade cost to serve the domestic market, it prices more aggressively, giving rise to the possibility of an inefficient allocation. In spite of asymmetric information, we can devise a contingent trade policy to correct this potential market failure. National governments, however, make excessive use of such a policy due to rent shifting motives, thus creating another inefficiency. The expected inefficiency of national policy is found to be comparatively larger (lower) at low (high) trade costs. Hence contingent trade policy conducted by national governments is preferred only when trade costs are high.

Keywords: Asymmetric information; Contingent trade policy; Efficiency; F12; F13 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: Contingent trade policy and economic efficiency (2013)
Working Paper: Contingent Trade Policy and Economic Efficiency (2011)
Working Paper: Contingent trade policy and economic efficiency (2011)
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DOI: 10.1007/s10290-019-00343-4

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