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Discretionary Trade Policy and Excessive Protection

Robert W. Staiger and Guido Tabellini
The American Economic Review
Vol. 77, No. 5 (Dec., 1987), pp. 823-837
Stable URL: http://www.jstor.org/stable/1810211
Page Count: 15
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Discretionary Trade Policy and Excessive Protection
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Abstract

This paper proposes a positive theory of tariff formation, based on the idea that the optimal trade policy may be time inconsistent. A benevolent government with redistributive goals may have an incentive to provide protection, since the redistributive effects of trade policy are larger if the policy is unanticipated. The suboptimal but time-consistent policy involves an excessive amount of protection. Furthermore, in a time- consistent equilibrium tariffs may dominate production subsidies. Thus, the requirement of time consistency can lead to a reversal of traditional normative ordering of tariffs and subsidies as instruments of trade policy.

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