Endogenous Trade Policy Under FDI

Journal of International Economics

Posted: 7 Sep 1998

See all articles by Hideo Konishi

Hideo Konishi

Boston College - Department of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Shlomo Weber

Southern Methodist University (SMU) - Department of Economics; New Economic School

Abstract

We endogenize the formation of domestic trade policy in a duopoly composed of a domestic firm and a foreign firm. The foreign firm can undertake foreign direct investment (FDI) in the domestic market should trade policies become too stringent. We model trade policy formation as a common agency game between the two firms (principals) and the domestic government (agent) as in Bernheim and Whinston (1986). The two firms make contributions to the government contingent on its trade policy actions. We show that the government prefers a VER to a tariff for two reasons. First, a VER leads to higher contributions from the foreign firm than a tariff (political economy motive). Second, a VER allows the domestic government to provide a higher level of protection to the domestic firm without generating FDI by the foreign firm (FDI deterring motive). Deterring FDI is crucial since FDI lowers the total surplus relative to free trade.

Note: This is a description of the paper and not the actual abstract.

JEL Classification: F12, F13, F23

Suggested Citation

Konishi, Hideo and Saggi, Kamal and Weber, Shlomo, Endogenous Trade Policy Under FDI. Journal of International Economics, Available at SSRN: https://ssrn.com/abstract=119669

Hideo Konishi (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-1209 (Phone)
617-552-2308 (Fax)

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

Shlomo Weber

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3577 (Phone)
214-768-1821 (Fax)

New Economic School ( email )

Moscow
Russia
+ 7-495-9569508 (Phone)

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