Protectionism versus non-protectionism under cost uncertainty in Cournot and Stackelberg markets

Abstract

This paper compares optimal protectionist trade policies with optimal non-protectionist policies in an environment where governments have private information about the marginal costs of the domestic firms. A country with an efficient firm is always better off not protecting its firm and subsidizing both domestic and foreign firms compared to being protectionist by taxing imports. However, under some circumstances, a country with an inefficient firm does better being protectionist and taxing imports.

I am grateful to David Collie, Bjorn Jorgensen, Semih Koray, Peter Neary, Murat Sertel, Hakan Orbay, Şule Özler and the participants of the 1996 Economic Theory Fest in Istanbul, 1996 European Meeting of Econometric Society in Istanbul, and the III. International Meeting of the Society for the Advancement of Economic Theory in Antalya, for helpful comments and fruitful discussions.