Optimal Tariff, Spillovers and North-South Trade

Abstract

This paper investigates the issue of the optimal tariff policy of the domestic country (North) in an environment in which its trade with the foreign country (South) is accompanied by a leakage of technological information (spillovers). Three duopoly games were considered. The first one views spillovers as a parameter. In this setting the Northern government sets the tariff anticipating the subsequent competition between the firms. The second game assumes that the spillovers are a strategic variable under the control of the Southern government. The tariff and the optimal level of spillovers (interpreted as the degree of the intellectual property right protection), are determined now through the interaction between the Northern and Southern governments whose decisions precede the decisions of the firms. In the third game, the Northern government erects a tariff only if it observes the violation of intellectual property rights by the Southern government. Such a tariff is called a punitive tariff.