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Injury‐Based Protection with Auditing under Imperfect Information

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  • Philippe Kohler
  • Michael O. Moore

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.

Suggested Citation

  • Philippe Kohler & Michael O. Moore, 2001. "Injury‐Based Protection with Auditing under Imperfect Information," Southern Economic Journal, John Wiley & Sons, vol. 68(1), pages 42-59, July.
    • Handle: RePEc:wly:soecon:v:68:y:2001:i:1:p:42-59
    DOI: 10.1002/j.2325-8012.2001.tb00396.x
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    References listed on IDEAS

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