Endogenous Quality Effects of Trade Policy
1999-12-22
Research Paper
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We study the optimal trade policy against a foreign oligopoly with endogenous quality. We show that, under the Most Favoured Nation (MFN) clause, a uniform tariff policy is always welfare improving over the free trade equilibrium. However, a nonuniform tariff policy is always desirable on welfare grounds. First best policy typically consists of setting a subsidy on the low-quality product and a tax on high-quality one. Another example of such a nonuniform tariff policy is a Regional Trade Agreement (RTA). We show that, if a welfare improvement is possible through a RTA, it is always with the low- quality producing country that it has to be achieved.
Keywords
- endogenous quality
- hedonic prices
- most favoured nation (MFN) clause
- optimal tariff
- regional trade agreement (RTA)
Classifications using
Journal of Economic Literature (JEL) Classification System
- F15 : Economic Integration
- F13 : Commercial Policy; Protection; Promotion; Trade Negotiations; International Organizations
- F12 : Models of Trade with Imperfect Competition and Scale Economies
Automatically Extracted Terms
- q ait
- ibr m
- t e e
- l y g
- t f n
- t e l
- e n n
- io lec
- q il iu
- int r t
- h t e
- fint r t
- t h e
- q ait n
- n n n
- m t r
- l ypr
- l y pr
- ia ef r
- i r n
