A theory of dynamic tariff and quota retaliation

Nadeem Naqvi

MPRA Paper from University Library of Munich, Germany

Abstract: This paper establishes relationships between static Nash equilibria and dynamic Markov perfect equilibria of tariff and quota retaliation games. In supermodular games where tariffs are strategic complements, the steady state of every, symmetric Markov perfect equilibrium must have lower tariffs than in the static equilibrium. If tariffs are strategic substitutes, tariffs in the dynamic game are higher than in the static equilibrium. The supermodular case is extended to quota competition. Instead of the well-known non-equivalence between tariff and quota retaliation outcomes under complete myopia, in some circumstances, free trade can be supported in the steady state of a Markov perfect equilibrium, regardless of whether policies employed are quotas or tariffs. We reach the conclusion that the effect of introducing dynamics crucially depends on whether the policy instruments employed by the countries are strategic substitutes or complements irrespective of whether they are tariffs or quotas.

Keywords: Foreign trade policy; Tariff; Quota; Retaliation; Dynamic Game; Markov perfect equilibrium; Supermodular games (search for similar items in EconPapers)
JEL-codes: C73 F13 (search for similar items in EconPapers)
Date: 2010-12-23
New Economics Papers: this item is included in nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: A Theory of Dynamic Tariff and Quota Retaliation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:27656

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