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Dynamic Tariffs with Asymmetric Information

Reizman, Raymond G. (1990) Dynamic Tariffs with Asymmetric Information. Social Science Working Paper, 720. California Institute of Technology , Pasadena, CA. (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20170901-143535221

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Abstract

Recent work in game theory has demonstrated how cooperative outcomes can be sustained when the game is played repeatedly, defectors are punished, but agents play non-cooperatively. This methodology is applied here to determine when two countries can sustain freer trade given that they determine trade policies non-cooperatively. We focus on the role of asymmetric information. Countries have private information about the extent of their own protection, but the overall level of protection can be thought of as private information. Therefore, any agreement to eliminate or reduce tariffs is limited by the fact that countries can cheat on the agreement by using non-observable forms of protection. Using import trigger strategies, cooperation (in the form of low tariffs) can be supported. There a.re periodic reversionary (high tariff) episodes which necessarily occur. They are not the result of mistakes, attempted manipulation, or misperception. Neither country cheats on the low tariff agreement, but reversions to high tariffs are triggered by the random variable. In section V we examine a slightly different trigger strategy. Countries' strategies are based on their observations of the terms of trade. This alteration changes the results and in this case cooperation does not occur.


Item Type:Report or Paper (Working Paper)
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Additional Information:I thank Pat Conway, Russell Cooper, Avinash Dixit, James Friedman, Howard Gruenspecht, John Kennan, Ramon Marimon, Doug McManus, Roger Myerson, Rob Porter, Jennifer Reinganum, participants at the Mid-West International Economics Group meetings, the University of Western Ontario, and two anonymous referees for helpful comments and suggestions. Published as Riezman, Raymond. "Dynamic tariffs with asymmetric information." Journal of International Economics 30, no. 3-4 (1991): 267-283.
Group:Social Science Working Papers
Series Name:Social Science Working Paper
Issue or Number:720
Record Number:CaltechAUTHORS:20170901-143535221
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20170901-143535221
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81096
Collection:CaltechAUTHORS
Deposited By: Jacquelyn Bussone
Deposited On:05 Sep 2017 23:41
Last Modified:03 Oct 2019 18:38

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