Nash Equilibrium Tariffs and Illegal Immigration: An Analysis of Preferential Trade Liberalization
Federal Reserve Bank of St. Louis Working Paper No. 2007-021A
24 Pages Posted: 25 May 2007
Date Written: May 2007
We use a version of the small-union Meade model to consider the effects of interdependent import tariffs in the presence illegal immigration. First, we analyze the condition under which illegal immigration is likely to increase (or decrease) in response to reciprocal trade liberalization between the source and host nations (of illegal immigration). Next we describe the Nash equilibrium in tariffs between these nations and discus how a liberalization of tariffs starting from this Nash equilibrium is likely to affect their utility. Finally, we consider the effect of the host nation's liberalization of the import tariff (imposed on its imports from a third nation). We show that strategic considerations regarding the effect of this tariff liberalization on the Nash equilibrium tariffs can modify the traditional (trade creating/diverting) gains from such liberalization.
Keywords: Preferential Trade Agreement, illegal immigration, second-best tariff
JEL Classification: F11, F22
Suggested Citation: Suggested Citation