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Distributing The Gains From Trade With Incomplete Information

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  • Robert C. Feenstra
  • Tracy R. Lewis

Abstract

We argue that the incomplete information which the government has about domestic agents means that tariffs become an optimal instrument to protect them from import competition. Using a model where agents have private information about their endowments, we solve for the optimal government policy subject to the political constraint of ensuring Pareto gains from trade, the incentive compatibility constraint, and the government's budget constraint. We find that the optimal policy takes the form of nonlinear tariffs. These tariffs are never complete, in the sense of bringing prices back to their initial level, but always allow some individuals to be strictly better off than at the initial prices.

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  • Robert C. Feenstra & Tracy R. Lewis, 1991. "Distributing The Gains From Trade With Incomplete Information," Economics and Politics, Wiley Blackwell, vol. 3(1), pages 21-39, March.
    • Handle: RePEc:bla:ecopol:v:3:y:1991:i:1:p:21-39
    DOI: 10.1111/j.1468-0343.1991.tb00037.x
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    1. Robert C. Feenstra & Jagdish N. Bhagwati, 1982. "Tariff Seeking and the Efficient Tariff," NBER Chapters, in: Import Competition and Response, pages 245-262, National Bureau of Economic Research, Inc.
    2. Lewis, Tracy R. & Feenstra, Robert & Ware, Roger, 1989. "Eliminating price supports : A political economy perspective," Journal of Public Economics, Elsevier, vol. 40(2), pages 159-185, November.
    3. Cassing, James H. & Hillman, Arye L., 1985. "Political influence motives and the choice between tariffs and quotas," Journal of International Economics, Elsevier, vol. 19(3-4), pages 279-290, November.
    4. Magee,Stephen P. & Brock,William A. & Young,Leslie, 1989. "Black Hole Tariffs and Endogenous Policy Theory," Cambridge Books, Cambridge University Press, number 9780521377003, October.
    5. Robert C. Feenstra & Tracy R. Lewis, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1287-1307.
    6. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-985, December.
    7. Jagdish N. Bhagwati, 1982. "Import Competition and Response," NBER Books, National Bureau of Economic Research, Inc, number bhag82-1.
    8. Dinopoulos, Elias, 1983. "Import competition, international factor mobility and lobbying responses: the schumpeterian industry case," Journal of International Economics, Elsevier, vol. 14(3-4), pages 395-410, May.
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    1. Feenstra, Robert C. & Lewis, Tracy R., 1994. "Trade adjustment assistance and Pareto gains from trade," Journal of International Economics, Elsevier, vol. 36(3-4), pages 201-222, May.
    2. Wolfgang Mayer & Raymond Riezman, 2013. "Voter Preferences for Trade Policy Instruments," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 11, pages 169-183, World Scientific Publishing Co. Pte. Ltd..
    3. Margarita Katsimi & Thomas Moutos, 2005. "Inequality and Relative Reliance on Tariffs: Theory and Evidence," CESifo Working Paper Series 1457, CESifo.
    4. Thierry Verdier, 2005. "Intégration commerciale « socialement responsable » : une approche en termes d'économie politique," Revue d’économie du développement, De Boeck Université, vol. 13(4), pages 55-121.
    5. Anne O. Krueger, 1996. "Introduction to "The Political Economy of American Trade Policy"," NBER Chapters, in: The Political Economy of American Trade Policy, pages 1-10, National Bureau of Economic Research, Inc.
    6. Robert C. Feenstra, 2009. "Review 2," Economic Journal, Royal Economic Society, vol. 119(535), pages 218-223, February.
      • RobertC. Feenstra, 2009. "Review 2," Economic Journal, Royal Economic Society, vol. 119(535), pages 218-223, February.
    7. Rodrik, Dani, 1994. "What does the Political Economy Literature on Trade Policy (Not) Tell Us That We Ought to Know?," CEPR Discussion Papers 1039, C.E.P.R. Discussion Papers.
    8. Matthew F. Mitchell & Andrea Moro, 2006. "Persistent Distortionary Policies with Asymmetric Information," American Economic Review, American Economic Association, vol. 96(1), pages 387-393, March.
    9. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubaşoĝlu, 2016. "Protection Versus Promotion: An Empirical Investigation," World Scientific Book Chapters, in: The Political Economy of Trade Policy Theory, Evidence and Applications, chapter 12, pages 221-236, World Scientific Publishing Co. Pte. Ltd..
    10. Nuno Limão & Arvind Panagariya, 2018. "Inequality and endogenous trade policy outcomes," World Scientific Book Chapters, in: Policy Externalities and International Trade Agreements, chapter 8, pages 237-254, World Scientific Publishing Co. Pte. Ltd..
    11. Andrea Moro & Matthew F. Mitchell, 2005. "Informationally Efficient Trade Barriers," Public Economics 0503004, University Library of Munich, Germany.

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