From Inefficient Behind-the-Border Policies to Inefficient Trade Agreements: A Two-Tier Asymmetric Information Model

Abstract

We consider a general equilibrium model of international trade with two layers of informational asymmetries. Private information of Home producers on costs affects the design of ‘behind-the-border’ policies reflecting the political influence of inefficient producers. Home's supply is contracted, causing trade, and motivating the use of tariffs. Eliminating those instruments by means of a trade agreement may become impossible once Home has also private information on its redistributive concerns. Home, when subject to strong influence by inefficient producers, might be reluctant to adopt free trade, which may lead to limited tariff cuts and give a role for export subsidies.

Reference

Antoine Bouët, David Laborde, and David Martimort, “From Inefficient Behind-the-Border Policies to Inefficient Trade Agreements: A Two-Tier Asymmetric Information Model”, The Economic Journal, vol. 111, n. 636, May 2021, p. 1555–1592.