Welfare implications of government intervention in markets facing incomplete and asymmetric information
Description
International trade often occurs in imperfectly competitive markets. If these markets are profitable, a government may want to intervene in order to increase the market share of domestic firms via subsidies, or may try to capture a share of foreign firm profits by levying tariffs on imports. Early papers by Brander and Spencer (1983, 1984) and Eaton and Grossman (1986) began investigations into the benefits of trade intervention. They showed that governmental intervention into oligopolistic markets can result in greater national welfare than what would result under free trade This dissertation provides three extensions to the trade literature. A common link among the three essays is the concept of incomplete information. An optimal output level for a firm is a function of the market demand, the firm's cost, and the competitor's cost. If the firm is uncertain about one of these parameters, they may end up over-producing or under-producing. If the domestic firm shares its private information only with the domestic government, any action by the government may signal the competitiveness of the domestic firm to the foreign firm. This in turn will have a Bayesian updating effect, causing the foreign firm to alter its level of production Firm and market structures vary in the different essays. Uncertainty may be in the form of costs, or with regard to market demand. Production flexibility varies, as does the concentration of competition. The essays examine both unilateral and bilateral intervention. Subsidizing a domestic firm, or imposing a tariff on a foreign firm, may make the domestic firm more competitive. However, if domestic and foreign governments intervene simultaneously, it may not be possible to gain welfare at the other's expense The dissertation is from a domestic government's perspective, which is solely concerned with maximizing national welfare. The government's goal is to shift profits from foreign firms to domestic firms, consumers, or government coffers. The essays compare the expected welfare that would result from the usage of different policy instruments, and show the problem that uncertainty can create in achieving effective policy coordination. This addresses how the government may select an optimal trade policy