Injury‐Based Protection with Auditing under Imperfect Information

Philippe Kohler and Michael O. Moore

Southern Economic Journal, 2001, vol. 68, issue 1, 42-59

Abstract: We analyze optimal protection when a benevolent government must maintain nonnegative domestic profits and when the domestic import‐competing firm has private information about its costs. A costly audit mechanism can deter strategic manipulation of this private information. We show that a high penalty/low probability of investigation is optimal when the shadow price of the firm profit is low compared with the audit cost. A low penalty/high probability of investigation is optimal when there is a low investigation cost and a high shadow price of firm profit. In this latter case, the trade authority obtains truthful announcements by directly auditing the firm.

Date: 2001
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https://doi.org/10.1002/j.2325-8012.2001.tb00396.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:68:y:2001:i:1:p:42-59

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