Contingent Trade Policy and Economic Efficiency

32 Pages Posted: 13 May 2011

See all articles by Phillip McCalman

Phillip McCalman

University of California, Santa Cruz - Department of Economics

Frank Stähler

University of Tuebingen - Department of Economics; University of Adelaide - School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Gerald Willmann

Bielefeld University; IfW Kiel; KU Leuven; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2011

Abstract

This paper develops an efficiency theory of contingent trade policies. We model the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete information about production costs. The cost distributions are asymmetric because the foreign firm has to pay a trade cost. We show that the foreign firm prices more aggressively to overcome its cost disadvantage. The resulting possibility of an inefficient allocation justifies the use of contingent trade policy on efficiency grounds. Contingent trade policy that seeks to maximize global welfare can avoid the potential inefficiency. National governments, on the other hand, make excessive use of contingent trade policy due to rent shifting motives. The expected inefficiency of national policy is larger (smaller) for low (high) trade costs compared to the laissez-faire case. In general, there is no clear ranking between the laissez-faire outcome and a contingent national trade policy.

Keywords: Contingent Trade Policy, Efficiency

JEL Classification: F12, F13

Suggested Citation

McCalman, Phillip and Stähler, Frank and Willmann, Gerald, Contingent Trade Policy and Economic Efficiency (April 2011). Available at SSRN: https://ssrn.com/abstract=1833195 or http://dx.doi.org/10.2139/ssrn.1833195

Phillip McCalman (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

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Frank Stähler

University of Tuebingen - Department of Economics ( email )

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University of Adelaide - School of Economics ( email )

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Gerald Willmann

Bielefeld University ( email )

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IfW Kiel ( email )

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KU Leuven ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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