The Myth of Profit-Shifting Trade Policies

Koska, Onur A. and Staehler, Frank (2014): The Myth of Profit-Shifting Trade Policies.

Abstract

Since Dixit (1984), it is well accepted that a home country's best policy is to ban imports in an oligopolistic market if the resulting monopoly has a cost advantage over imports. This note (i) provides a formal proof and (ii) extends this result to symmetric firms. When domestic instruments are available, the optimal policy in a non-cooperative game is to subsidize local production such that it completely replaces imports. This policy is also globally first-best.

• Item Type: MPRA Paper
• Language: English
• Keywords: Import tariffs, export subsidies, profit shifting
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations

References

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