Tariff policy for a monopolist in a signaling game

Abstract

We examine the incentives for a government to levy an optimal tariff on a foreign monopolist with unknown costs. With complete information, the home government uses a discriminatory tariffs policy to extract rents. If the government is incompletely informed about costs, we show that under reasonable conditions the unique equilibrium involves pooling where the firm exports the same quantity regardless of its efficiency. We find that in general home welfare is higher under alternative policies such as uniform tariffs or free trade, suggesting that trade policies that are motivated by rent extraction are unlikely to be robust to the introduction of incomplete information.