Free Trade Versus Strategic Trade as a Choice between Two 'Second-Best' Policies: A Symmetric Versus Asymmetric Information Analysis

41 Pages Posted: 11 Sep 2001

See all articles by Delia Ionascu

Delia Ionascu

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute), Prague; Copenhagen Business School

Krešimir Žigić

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: August 2001

Abstract

In this Paper, we analyse the following policy dilemma: strategic trade policy versus free trade when the domestic government is bound to intervene only after the domestic firm's strategic variable is chosen. This intervention allows the domestic firm to manipulate the domestic government and results in a socially inefficient choice of the strategic variable. Commitment to free trade leads, however, to forgoing the benefits of profit shifting. Yet, from the social point of view, free trade may be optimal even under the assumption of symmetric information. Due to costly signalling, this result is reinforced in the case of asymmetric information.

Keywords: First-best versus second-best policy, free trade, government's commitment, signalling and strategic trade policy

JEL Classification: F13

Suggested Citation

Ionascu, Delia and Žigić, Krešimir, Free Trade Versus Strategic Trade as a Choice between Two 'Second-Best' Policies: A Symmetric Versus Asymmetric Information Analysis (August 2001). Available at SSRN: https://ssrn.com/abstract=283126

Delia Ionascu (Contact Author)

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute), Prague ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic
+42 02 2400 5223 (Phone)
+42 02 2421 1374 (Fax)

HOME PAGE: http://www.cerge-ei.cz

Copenhagen Business School

Porcelænshaven 16 A, 1
Frederiksberg C, DK-2000
Denmark

Krešimir Žigić

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic
+42 02 2400 5245 (Phone)
+42 02 2421 1374 (Fax)

HOME PAGE: http://www.cerge-ei.cz

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