Contingent trade policy and economic efficiency
P McCalman, F Stähler, G Willmann
Review of World Economics | Springer (part of Springer Nature) | Published : 2019
This paper models the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete cost information. As the foreign firm incurs a trade cost to serve the domestic market, it prices more aggressively, giving rise to the possibility of an inefficient allocation. In spite of asymmetric information, we can devise a contingent trade policy to correct this potential market failure. National governments, however, make excessive use of such a policy due to rent shifting motives, thus creating another inefficiency. The expected inefficiency of national policy is found to be comparatively larger (lower) at low (high) trade costs. Hence contingent trade..View full abstract
Awarded by Australian Research Council
We thank an Associate Editor, two anonymous referees, Giovanni Maggi, Nic Schmitt and participants at several conferences and seminars for helpful comments and suggestions. McCalman gratefully acknowledges financial support from the Australian Research Council, Grant DP-140101128.