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Trade Policy under Asymmetric Information

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  • Lapan, Harvey E.
  • Melkonian, Tigran

Abstract

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.

Suggested Citation

  • Lapan, Harvey E. & Melkonian, Tigran, 2002. "Trade Policy under Asymmetric Information," ISU General Staff Papers 200209010700001220, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genstf:200209010700001220
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    1. Kyle Bagwell & Robert W. Staiger, 2001. "Domestic Policies, National Sovereignty, and International Economic Institutions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 519-562.
    2. Lapan, Harvey E, 1988. "The Optimal Tariff, Production Lags, and Time Consistency," American Economic Review, American Economic Association, vol. 78(3), pages 395-401, June.
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    4. Collie, David & Hviid, Morten, 1994. "Tariffs for a foreign monopolist under incomplete information," Journal of International Economics, Elsevier, vol. 37(3-4), pages 249-264, November.
    5. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-661, May.
    6. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
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    JEL classification:

    • F10 - International Economics - - Trade - - - General

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