Working Paper: NBER ID: w1977
Authors: Robert C. Feenstra
Abstract: We consider a two country trade model with production uncertainty. If \ncomplete contingent markets do not exist, it is desirable for governments to \nadopt some trade policies to share the production risk. A full information \npolicy involves income transfers across countries, which can be achieved by \nequal import tariffs and export subsidies. With incomplete information we \nconsider incentive compatible trade policies, which are designed to be truth \nrevealing while partially sharing the production risk. In this case the \ntariff in one country may differ from the export subsidy abroad.
Keywords: Trade Policy; Production Uncertainty; Incentive Compatibility
JEL Codes: F1; D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade policies (tariffs and subsidies) (F13) | welfare outcomes (I38) |
| full information trade policy (equal tariffs and export subsidies) (F13) | first-best equilibrium (D51) |
| home government cannot credibly announce state of nature (H12) | non-incentive compatible policy (D82) |
| non-incentive compatible policy (D82) | misrepresentation of state (H79) |
| home country is risk-averse (D81) | preference to falsely announce lower utility state (D11) |
| incentive compatible trade policies (F13) | tariffs that differ from export subsidies (F14) |
| structure of trade policies (F13) | incentives for truthful reporting of state (H79) |
| incentives for truthful reporting of state (H79) | overall welfare (I31) |