Trade Policy with Imperfect Markets

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The recognition of uncertainty and imperfect competition has led to a substantial rethinking of the economic theory of international trade and commercial policy. This project aims to expand the frontiers of this research in four broad areas, the themes of which evolve naturally from the author's previous work. A. Hysteresis in Trade: When firms must incur costs to enter and leave a market, transient currency misalignments have persistent effects on import volumes and prices. Previous models of this phenomenon were oversimplified and unrealistic. The proposed research has simple but more realistic descriptions of exchange rate movements (notably Brownian motion). Some results for competitive firms have been obtained; future work will include imperfect competition, and examine related policy issues like oil import taxes. B. International R & D Competition: Since R & D is inherently risky, good analysis of policy in this area must employ a stochastic dynamic game model. Such a model is formulated; the research will consist of extensive numerical computations necessary to solve it. Hypotheses about the intensity and the riskiness of strategies appropriate for leaders and laggards in the R & D race will be tested. The design of trade and subsidy policy for high-tech industries will be examined. C. International Policy Conflict and Coordination: The main issue to be researched is the avoidance of Prisoner's Dilemmas: the standard tariff retaliation war for competitive industries, and the strategic import tariff or export subsidy for oligopolies. Prisoners' Dilemmas over many dimensions of trade policies, and games of bargaining to divide the potential gains from trade liberalization, will be studied. D. Trade Policy Under Uncertainty: Markets for pooling and allocating risk are often incomplete, especially in LDC's. However, casual arguments that advocate the use of trade restrictions for insurance do not survive rigorous analysis. More precise formulations of the market failures, and appropriate policy responses, will be studied.