Abstract
We study the informational impacts of multilateral voluntary export restraints (henceforth VERs) in an international trade model with differentiated products [1]. We first show that with competing mechanisms, the two firms’ lying intentions are strategic complements and will increase with the degree of product differentiation. Next, we show that each government will design their VERs menus to allow for only partial revelation. Contrary to the single intervention case [2], a separating equilibrium where each country’s domestic firm truthfully reveals its private information does not exist under multilateral policy interventions. Finally, we demonstrate that trade retaliation, when the two governments’ VERs are positively related, will happen when the government believes that its domestic firm is more likely to be inefficient.
Highlights
It is well known that government intervention can shift rents by providing a strategic advantage to the domestic firm
Eaton and Grossman [4] demonstrated that the optimal policy will be an export tax, when the domestic firm competes with a foreign firm in prices1
We demonstrate that trade retaliation, when the two governments’ VERs are positively related, will happen when the government believes that its domestic firm is more likely to be inefficient
Summary
It is well known that government intervention can shift rents by providing a strategic advantage to the domestic firm. We demonstrate that trade retaliation, when the two governments’ VERs are positively related, will happen when the government believes that its domestic firm is more likely to be inefficient. This result partly reflects the result by Martina and Vergoted [15], who discussed the role of retaliation in trade agreements and showed that retaliation is a necessary feature of any efficient equilibrium. Our results conclude that trade retaliation happens when the government believes that its domestic firm is more likely to be inefficient This partly coincides with Martina and Vergoted’s [15] results.
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