Strategic Trade Policy With Incompletely Informed Policymakers
S. Lael Brainard
Ever since the inception of research on strategic trade policy,
economists have warned that the informational requirements are high, and
unlikely to be met in practice. This paper investigates the implications of
incomplete information for a simple, rent-shifting trade policy of the type
proposed in Brander-Spencer (1985). We find that asymmetric information
undermines the precommitrnent effect of unilateral government intervention.
This "screening" effect induces a downward distortion in the optimal subsidy,
and it may be so great as to require a tax rather than a subsidy for high levels
of uncertainty, given a zero-profit participation constraint. Second, in contrast
to the full-information case with strategic substitutes, the introduction of a rival
interventionist government reinforces rather than countervails the
precommitment effect, by reducing the incentive for the domestic firm to
misrepresent its private information. Finally, when a nonintervention-profit
participation constraint is substituted for the conventional zero-profit
participation constraint to take into account the special relationship between
firms and policymakers in trade, the government eschews intervention
altogether for high levels of uncertainty.
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