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Optimal tariffs, tariff jumping, and heterogeneous firms

Matthew Cole () and Ronald Davies ()

No 200919, Working Papers from School of Economics, University College Dublin

Abstract: The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.

Keywords: Tariff; International business enterprises; Investments, Foreign (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-int
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http://hdl.handle.net/10197/2617 First version, 2009 (application/pdf)

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Working Paper: Optimal Tariffs, Tariff Jumping, and Heterogeneous Firms (2009) Downloads
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