Premium
The Optimal Penal Code vs. Infinite Nash Reversion in Trade Liberalization
Author(s) -
Furusawa Taiji
Publication year - 1999
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00192
Subject(s) - economics , tariff , nash equilibrium , punishment (psychology) , free trade , penal code , punitive damages , liberalization , microeconomics , mean reversion , international economics , simple (philosophy) , mathematical economics , econometrics , market economy , law , psychology , social psychology , political science , philosophy , epistemology
This paper derives Abreu’s stick‐and‐carrot strategy optimal penal codes ( Journal of Economic Theory , 1986, 191–225 in a partial equilibrium model that has been widely used to examine trade liberalization. Unless the asymmetry between countries is significant, the optimal penal codes take a simple form. It is also shown that the difference between the most‐cooperative pairs of tariffs supported by two schemes, the optimal penal code and infinite Nash reversion, depends crucially on the size of the surplus from exports that a deviating country forgoes when the other country places an embargo, rather than the (punitive) optimum tariff, on imports in the punishment.