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Strategic Trade Policy and Mode of Competition: Symmetric versus Asymmetric Information

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  • Delia Ionascu
  • Kresimir Zigic

Abstract

In this paper, we analyze the following policy dilemma: strategic trade policy versus free trade when the domestic government is bound to intervene only after the domestic firm's strategic variable is chosen. This intervention allows the domestic firm to manipulate the domestic government and results in a socially inefficient choice of the strategic variable. However, commitment to free trade leads to forgoing the benefits from profit-shifting. Yet, from the social point of view, free trade may be optimal even under the assumption of symmetric information. Due to costly signaling, this result is reinforced in the case of asymmetric information.

Suggested Citation

  • Delia Ionascu & Kresimir Zigic, 2001. "Strategic Trade Policy and Mode of Competition: Symmetric versus Asymmetric Information," CERGE-EI Working Papers wp174, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp174
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    Cited by:

    1. Vadym Konchyn, 2008. "Evolution of Ukrainian Economy: New Trade Theory Evidence," The IUP Journal of Applied Economics, IUP Publications, vol. 0(2), pages 80-110, March.

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    More about this item

    Keywords

    strategic trade policy; free trade; first-best versus second best policy; government's commitment; signaling;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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