Contingent Protection as Better Insurance

16 Pages Posted: 3 Mar 1999 Last revised: 7 May 2000

See all articles by Thomas J. Prusa

Thomas J. Prusa

Rutgers University; National Bureau of Economic Research (NBER)

Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA)

Date Written: February 1999

Abstract

We formalize the notion that GATT exceptions such as antidumping and escape clause actions can act as insurance for import competing sectors affected by adverse price shocks. We use a general equilibrium model with several import competing sectors and assume incomplete markets so that agents cannot contract insurance. We show that these measures are superior to uniform tariffs as insurance mechanisms. Moreover, we demonstrate that the optimal uniform policy may not involve a tariff at all, but rather might entail an export tax. We also show that a tax cum subsidy policy (i.e., taxing all sectors in order to subsidize the shocked sector) improves welfare.

Suggested Citation

Prusa, Thomas J. and Fischer, Ronald D., Contingent Protection as Better Insurance (February 1999). NBER Working Paper No. w6933. Available at SSRN: https://ssrn.com/abstract=149649

Thomas J. Prusa (Contact Author)

Rutgers University ( email )

Dept of Economics
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908-932-7670 (Phone)
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National Bureau of Economic Research (NBER)

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Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA) ( email )

Republica 701
Casilla 2777
Santiago
Chile
+56/2/678 4055 (Phone)
+56/2/689 7895 (Fax)

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