Information and Disclosure in Strategic Trade Policy
We examine the standard assumption in the strategic trade policy literature that governments possess complete information. Assuming instead that firms have better information, we explore the long-term incentives for firms to consistently disclose information to their governments in the standard setting. We find that with quantity competition firms disclose both demand and cost information to the governments, thereby giving some justification to the literature’s omniscient-government assumption. Further, the equilibrium exhibits an informational prisoner’s dilemma with demand uncertainty, but not with cost uncertainty. With price competition, however, firms have no incentives to disclose information.
We relax the standard assumption in the strategic trade policy literature that governments possess complete information about the economy. Assuming instead that governments must obtain information from firms, we examine firms' incentive to disclose information to the governments in the Brander-Spencer setting. With quantity competition, we find firms disclosing both demand and cost information, thereby justifying the literature's omniscient-government assumption. With price competition, however, firms have no incentives to disclose demand or cost information, so governments remain uninformed. Further, with quantity competition and unknown demand, governments are caught in an informational prisoner's dilemma.
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