Tariff Policy and Entry With Cost‐based Informational Asymmetries

Abstract

This study introduces a cost-based informational asymmetry into a two-period signaling model. We examine the effects of import tarifpolicy within this environment of incomplete information and compare them to the standard, full information effects. When tariff rates can be credibly fixed, the standard effects of tarflpolicy may be signi3cantly altered. For example, lower tariffs may discourage foreign entry because of the induced signaling effects of tarifSpolicy. Moreover; because the impact of tariff policy depends on the cost structure of domestic firms, uninformed policymakers will not be able to predict the qualitative effects of tariff policy. (JEL F12, F13)

Signaling and Tariff Policy: The Strategic Multistage Rent Reduction Game

“…Could the actions or reactions of foreign firms alter the equilibria? These and other questions are receiving attention from economists in the context of somewhat different substantive issues, such as the use of export subsidies to signal (un)competitiveness of domestic producers to those abroad as a result of varying motivations (Brainard and Martimort, 1996;Brander, 1995;Hviid, 1994, 1999;Herander and Kamp, 1999;Kolev and Prusa, 1999). Thus the potential to build further upon modeling efforts elsewhere already exists.…”

Infant Industry Protection Revisited

“…Crucially, this duty is assumed to be both credibly committed4 and also sufficient to ensure the viability of the home firm. More recently, Herander and Kamp (1999) have deployed the Milgrom-Roberts model in a setting that is the mirror image of the one I have in mind: they model a domestic incumbent who attempts to deter a foreign entrant by signalling low costs in the first period. They examine the effects of different levels of a tariff that remains committed for both periods.…”

“…I shall not explain the various incentive-compatibility constraints that yield the equilibria of the Milgrom-Roberts model with two types of incumbent, since they are well-known from Tirole (1988); see also Herander and Kamp (1999). I focus initially on a separating equilibrium, in which the foreign firm's behavior in period 1 enables the home firm and government to infer its type, so that h is updated to 0 or 1 for period 2.…”

Tariff Policy and the Foreign Entry Decision in the Presence of a Cost‐Based Informational Asymmetry

“…2 2 A significant body of literature has recently emerged which recognizes and incorporates the role of incomplete information in global models of trade and trade policy under imperfect competition. A representative, although by no means exhaustive, list includes Collie and Hviid (1994, 1999), Hartigan (1994), Herander and Kamp (1999), Kolev and Prusa (2002), Qiu (1994), and Wright (1998). …”

“…13 13 Because we are interested in whether or not the incentive to tariff jump remains in the presence of incomplete information, we have omitted a formal presentation of the compatibility conditions underlying equilibria at tariffs less than t J . These equilibria are detailed in Herander and Kamp (1999). …”