Protectionism versus non-protectionism under cost uncertainty in Cournot and Stackelberg markets

Abstract

This paper compares optimal protectionist trade policies with optimal non-protectionist policies in an environment where governments have private information about the marginal costs of the domestic firms. A country with an efficient firm is always better off not protecting its firm and subsidizing both domestic and foreign firms compared to being protectionist by taxing imports. However, under some circumstances, a country with an inefficient firm does better being protectionist and taxing imports.