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The Optimal Penal Code vs. Infinite Nash Reversion in Trade Liberalization

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  • Furusawa, Taiji

Abstract

This paper derives Abreu's stick-and-carrot strategy optimal penal codes (1986) in a partial equilibrium model that has been widely used to examine trade liberalization. Unless the asymmetry between countries is significant, the optimal penal codes take a simple form. It is also shown that the difference between the most-cooperative pairs of tariffs supported by two schemes, the optimal penal code and infinite Nash reversion, depends crucially on the size of the surplus from exports that a deviating country foregoes when the other country places an embargo, rather than the (punitive) optimum tariff, on imports in the punishment. Copyright 1999 by Blackwell Publishing Ltd.

Suggested Citation

  • Furusawa, Taiji, 1999. "The Optimal Penal Code vs. Infinite Nash Reversion in Trade Liberalization," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 673-681, November.
    • Handle: RePEc:bla:reviec:v:7:y:1999:i:4:p:673-81
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    Cited by:

    1. Tadashi Sekiguchi & Katsutoshi Wakai, 2016. "Repeated Games with Recursive Utility:Cournot Duopoly under Gain/Loss Asymmetry," Discussion papers e-16-006, Graduate School of Economics , Kyoto University.
    2. Keck, Alexander & Schropp, Simon, 2007. "Indisputably essential: The economics of dispute settlement institutions in trade agreements," WTO Staff Working Papers ERSD-2007-02, World Trade Organization (WTO), Economic Research and Statistics Division.

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