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Author:Miravete, E.J.
Title:Time-consistent protection with learning by doing
Journal:European Economic Review
2003 : OCT, VOL. 47:5, p. 761-790
Index terms:Equilibrium analysis
Markov chains
Stochastic processes
Tariffs
Models
Language:eng
Abstract:The present paper builds a dynamic equilibrium model that accounts for learning-by-doing effects that link firmsÂ’ strategies over time. The model shows that the existence of dynamic economies of scale suffices to overcome the traditional government's lack of commitment of its tariff policy. This paper compares the infinite horizon Markov perfect equilibrium of this game with the dynamic equilibrium under commitment as well as the static Nash equilibrium. Equilibrium strategies are derived in closed form by solving a linear-quadratic differential game. Optimal trade policy involves higher tariff levels than in the static setup in order to account for future gains in efficiency. Under reasonable assumptions, the unique stable MPE is characterized by a domestic price and tariff that decrease as experience accumulates, thus supporting the future liberalization of trade.
SCIMA record nr: 248646
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