Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets are Incomplete

38 Pages Posted: 4 Mar 2007 Last revised: 7 Sep 2010

See all articles by Jonathan Eaton

Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: November 1981

Abstract

Free trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.

Suggested Citation

Eaton, Jonathan and Grossman, Gene M., Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets are Incomplete (November 1981). NBER Working Paper No. w0797. Available at SSRN: https://ssrn.com/abstract=967948

Jonathan Eaton (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

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HOME PAGE: http://www.econ.nyu.edu/user/eatonj/

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Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

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Princeton University - Department of Economics ( email )

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

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Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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