Time-Consistent Protection with Learning by Doing

46 Pages Posted: 6 Sep 2001

See all articles by Eugenio J. Miravete

Eugenio J. Miravete

University of Texas at Austin; Centre for Economic Policy Research (CEPR)

Date Written: September 2001

Abstract

Can a government induce efficiency gains in domestic industry by protecting it against foreign competition? Would such trade protection be time-consistent? The present Paper builds a dynamic equilibrium model that accounts for learning-by-doing effects that link firms' strategies over time. The model shows that the existence of dynamic economies of scale suffices to overcome the traditional government's lack of commitment to its tariff policy. This Paper compares the infinite horizon Markov perfect equilibria of this game with the dynamic equilibrium under commitment as well as the static Nash equilibrium. Equilibrium strategies are derived in closed form by solving a linear-quadratic differential game. Optimal trade policy involves higher tariff levels than in the static setup in order to account for future gains in efficiency.

Keywords: Infant-industry, tariff protection, infinite horizon Markov perfect equilibria, linear-quadratic differential game

JEL Classification: C73, F12, F13

Suggested Citation

Miravete, Eugenio J., Time-Consistent Protection with Learning by Doing (September 2001). Available at SSRN: https://ssrn.com/abstract=282576

Eugenio J. Miravete (Contact Author)

University of Texas at Austin ( email )

Department of Economics
1 University Station C3100
Austin, TX 78712-0301
United States
512-232-1718 (Phone)
512-471-3510 (Fax)

HOME PAGE: http://www.eco.utexas.edu/facstaff/Miravete

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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