Strategic Trade Policy with Incompletely Informed Policymakers

45 Pages Posted: 25 Jul 2007 Last revised: 16 Aug 2010

See all articles by S. Lael Brainard

S. Lael Brainard

Deputy National Economic Advisor, The White House; National Bureau of Economic Research (NBER)

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 1992

Abstract

Ever since the inception of research on strategic trade policy, economists have warned that the informational requirements are high, and unlikely to be met in practice. This paper investigates the implications of incomplete information for a simple, rent-shifting trade policy of the type proposed in Brander-Spencer (1985). We find that asymmetric information undermines the precommitrnent effect of unilateral government intervention. This "screening" effect induces a downward distortion in the optimal subsidy, and it may be so great as to require a tax rather than a subsidy for high levels of uncertainty, given a zero-profit participation constraint. Second, in contrast to the full-information case with strategic substitutes, the introduction of a rival interventionist government reinforces rather than countervails the precommitment effect, by reducing the incentive for the domestic firm to misrepresent its private information. Finally, when a nonintervention-profit participation constraint is substituted for the conventional zero-profit participation constraint to take into account the special relationship between firms and policymakers in trade, the government eschews intervention altogether for high levels of uncertainty.

Suggested Citation

Brainard, S. Lael and Martimort, David, Strategic Trade Policy with Incompletely Informed Policymakers (May 1992). NBER Working Paper No. w4069. Available at SSRN: https://ssrn.com/abstract=476177

S. Lael Brainard (Contact Author)

Deputy National Economic Advisor, The White House ( email )

Old Executive Office Building
725 17th Street, NW
Washington, DC 20502
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
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Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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