Optimal trade policy, time consistency and uncertainty in an oligopsonistic world market

Abstract

This dissertation investigates the strategic behavior between countries that have purchasing power on the world market for a certain good. Tariffs and quotas are not equivalent protection instruments under non-cooperative behavior. Importers would be better off by choosing their policy cooperatively. If production decisions occur before consumption decisions, the ex-ante optimal policy is not time consistent because the ex-post elasticity of the residual foreign export supply is lower than the ex-ante elasticity. However, we show that the importers' inability to commit to their trade instrument may be welfare superior to the precommitment solution;We derive the equilibrium production policies if importers do not irrevocably commit to their ex-ante trade policy. Production instruments are not equivalent under noncooperative behavior. Provided trade is restricted with an import quota, the equilibrium production policy is to restrict domestic production below the competitive level. If trade is restricted with an import tariff, the equilibrium production policy may be to subsidize production. We derive conditions under which the ability of each importer to control domestic production increases welfare;In the next part of the dissertation, we endogenize the decision of two policy active importers to either commit to their import quota or keep the flexibility to revise their ex-ante quota once production decisions are made. Production in both importing countries is subject to an asymmetric random shock. Both policy active importers prefer not to commit to their trade policy given a sufficiently high degree of variance in production uncertainty. Under certain conditions, there exists an equilibrium where one country commits to its ex-ante quota while the other keeps the flexibility to revise the level of its quota after uncertainty is resolved;Finally, we examine the endogenous choice of trade instrument among two policy active importers. Production and consumption decisions are carried out simultaneously and the producers' cost function is subject to an asymmetric random shock. In a certain world, the equilibrium of the game entails both importers choosing to use an import quota. Under production risk, there exists an equilibrium where one country uses an import quota while the other uses an import tariff.