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Optimal tariffs, tariff jumping, and heterogeneous firms
Author(s)
Date Issued
2009-10-22
Date Available
2010-11-30T14:22:25Z
Abstract
The majority of research to date investigating strategic tariffs in the presence of
multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either
multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria
in which both pure exporters and multinationals coexist. We utilize this model to study
the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are
higher than the socially optimal tariffs. Unlike existing models with homogeneous
firms, we find that non-cooperative tariffs promote the existence of low-productivity
firms relative to the socially optimal tariffs. This highlights a new source of inefficiency
from tariff competition not found in models of homogeneous firms. In addition, we find
that in many cases the Nash equilibrium tariff when FDI is a potential firm structure
is lower than when it is not. As a result, FDI improves welfare by mitigating tariff
competition.
Sponsorship
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP 09 19
Subject – LCSH
Tariff
International business enterprises
Investments, Foreign
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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