TY  - JOUR
AU  - Eaton,Jonathan
AU  - Grossman,Gene M.
TI  - Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 797
PY  - 1985
Y2  - August 1985
UR  - http://www.nber.org/papers/w0797
L1  - http://www.nber.org/papers/w0797.pdf
N1  - Author contact info:
Jonathan Eaton
Department of Economics
Penn State University
608 Kern Graduate Building
University Park, PA 16802-3306
Tel: (814) 865 - 8871
Fax: (814) 863 - 4775
E-Mail: jxe22@psu.edu

Gene M. Grossman
International Economics Section
Department of Economics
Princeton University
Princeton, NJ 08544
Tel: 609/258-4823
Fax: 609/258-1374
E-Mail: grossman@princeton.edu
AB  - Free trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.
ER  -