WAS ALEXANDER HAMILTON RIGHT? LIMIT-PRICING FOREIGN MONOPOLY AND INFANT-INDUSTRY PROTECTION

Aditya Bhattacharjea

No 55, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: In 1791, Alexander Hamilton put forward an argument for infant-industry protection based on the need to overcome the entry-deterring behaviour of foreign monopolists. This paper recasts Hamilton's argument as a model of strategic trade policy under asymmetric information, and examines the credibility and time-consistency of such protection, and the intertemporal welfare trade-offs it involves. It finds that while Hamilton's prescription is valid for a particular case, it is not robust, and the optimal policy might instead involve a commitment not to protect the domestic industry.

Pages: 26 pages
Date: 1998-02
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