Contingent Trade Policy and Economic Efficiency

38 Pages Posted: 3 Jul 2013

See all articles by Philipp McCalman

Philipp McCalman

University of Melbourne - 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)

Date Written: July 2, 2013

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 incurs a trade cost to serve the domestic market. We show that the foreign firm prices more aggressively to overcome its cost disadvantage. This creates the possibility of an inefficient allocation, justifying the use of contingent trade policy on efficiency grounds. Despite an environment of asymmetric information, contingent trade policy that seeks to maximize global welfare can be designed to 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 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, Philipp and Stähler, Frank and Willmann, Gerald, Contingent Trade Policy and Economic Efficiency (July 2, 2013). Bielefeld Working Papers in Economics and Management No. 15-2013, Available at SSRN: https://ssrn.com/abstract=2288596 or http://dx.doi.org/10.2139/ssrn.2288596

Philipp McCalman

University of Melbourne - Department of Economics ( email )

Victoria, 3010
Australia

Frank Stähler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.frank-staehler.de

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Gerald Willmann (Contact Author)

Bielefeld University ( email )

Universitätsstraße 25
Bielefeld, NRW 33613
Germany

IfW Kiel ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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