The myth of profit-shifting trade policies

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KOSKA A. O., Staehler F.

ECONOMICS LETTERS, vol.140, pp.39-41, 2016 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 140
  • Publication Date: 2016
  • Doi Number: 10.1016/j.econlet.2015.12.024
  • Journal Name: ECONOMICS LETTERS
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.39-41
  • Middle East Technical University Affiliated: Yes

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. (C) 2016 Elsevier B.V. All rights reserved.