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Title: |
Free Trade versus Strategic Trade as a Choice between Two 'Second Best' Policies: A Symmetric versus Asymmetric Information Analysis |
| Author: |
Delia Ionascu and Kresimir Zigic |
| Author
Affiliation: |
Copenhagen Business School, Denmark; CERGE-EI, Prague, Czech Republic |
| Source: |
International Economic Journal, September 2005, v. 19, no. 3, pp.417-446 |
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Publication Date: |
September 2005 |
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Abstract: |
We analyze the following policy dilemma: strategic trade policy versus free trade when the domestic government is bound to intervene only after the domestic firm's strategic variable in the form of R&D investment is chosen, and when the information can be either symmetric or asymmetric. The novel feature of our model is that the information asymmetry stems from the assumption that the government may not a priori know the true mode of competition. The intervention in the above setup allows the domestic firm to manipulate the domestic government and results in a socially inefficient choice of the strategic variable. However, commitment to free trade leads to forgoing the benefits from profit-shifting. Yet, from the social point of view, free trade may be optimal even under the assumption of symmetric information. Due to costly signaling, this result is reinforced in the case of asymmetric information. |
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