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Review of World Economics

, Volume 155, Issue 2, pp 227–255 | Cite as

Contingent trade policy and economic efficiency

  • Phillip McCalmanEmail author
  • Frank Stähler
  • Gerald Willmann
Original Paper
  • 35 Downloads

Abstract

This paper models the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete cost information. As the foreign firm incurs a trade cost to serve the domestic market, it prices more aggressively, giving rise to the possibility of an inefficient allocation. In spite of asymmetric information, we can devise a contingent trade policy to correct this potential market failure. National governments, however, make excessive use of such a policy due to rent shifting motives, thus creating another inefficiency. The expected inefficiency of national policy is found to be comparatively larger (lower) at low (high) trade costs. Hence contingent trade policy conducted by national governments is preferred only when trade costs are high.

Keywords

Asymmetric information Contingent trade policy Efficiency 

JEL Classifications

F12 F13 

Notes

Acknowledgements

We thank an Associate Editor, two anonymous referees, Giovanni Maggi, Nic Schmitt and participants at several conferences and seminars for helpful comments and suggestions. McCalman gratefully acknowledges financial support from the Australian Research Council, Grant DP-140101128.

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Copyright information

© Kiel Institute 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of MelbourneVictoriaAustralia
  2. 2.School of Business and EconomicsUniversity of TübingenTübingenGermany
  3. 3.University of AdelaideAdelaideAustralia
  4. 4.CESifoMunichGermany
  5. 5.Department of EconomicsUniversity of BielefeldBielefeldGermany
  6. 6.IfW KielKielGermany

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