NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Distributing the Gains from Trade With Incomplete Information

Robert Feenstra, Tracy R. Lewis

NBER Working Paper No. 3277
Issued in March 1990
NBER Program(s):   ITI   IFM

We argue that the incomplete information which the government has about domestic agents means that tariffs become an optimal instrument to protect them from import competition. We solve for the optimal government policies. subject to the political constraint of ensuring Pareto gains from trade, the incentive compatibility constraint, and the government's budget constraint. We find that the optimal policies take the form of nonlinear tariffs, so that both buyers and sellers of the import face an effective price which exceeds its world level. We find that the tariffs are never complete, in the sense of bringing prices (or all individuals back to their initial level. Rather, it will always be possible to make some individuals strictly better off than at the initial prices, while ensuring that no persons are worse off.

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Document Object Identifier (DOI): 10.3386/w3277

Published: Economics and Politics, 3(1) March 1991, pp. 21-39

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