Dynamic Games In Trade And Development Economics

This chapter surveys dynamic game models in international economics and development economics. Section 4.1 is devoted to the effects of exogenously set trade policies (such as voluntary export restraints, quotas, export taxes or subsidies, trade liberalization) on welfare and profits when the market is dominated by international oligopolists that play a dynamic game. Section 4.2 shifts the focus to dynamic games played by two national governments: the classic problem of optimal tariffs and retaliation is examined in the light of the concept of feedback Nash equilibrium, and related equilibrium concepts in dynamic games. Section 4.3 deals with the issue of time-inconsistency of trade policies when a government acts as an open-loop Stackelberg leader, and setting tariffs against competitive foreign suppliers, to exploit terms of trade gain, or to encourage domestic investment. It also deals with ways to achieve time-consistent policies. Sections 4.4 and 4.5 deal with models of trade policies in the presence of an exhaustible resource. Some dynamic game models pertinent to development economics are reviewed in Section 4.6.