Publication

This paper develops an efficiency theory of contingent trade policies. The authors model the competition for a domestic market between one domestic and one foreign firm under conditions of incomplete information. As the foreign firm incurs a trade cost, the authors show that it prices more aggressively to overcome this disadvantage. This creates the possibility of an inefficient allocation. This provides a justification for the use of contingent trade policy, but national governments tend to employ such practices excessively due to rent shifting motives. Overall, the study indicates that there is no generalizable ranking of the outcomes achieved under free markets and contingent national trade policies.