Bidding for tariff exemptions in international oligopolies
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Bidding for tariff exemptions in international oligopolies Giorgos Stamatopoulos1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract An advice IMF often gives to its members that open up their markets to trade is to reduce the level of tariffs and to simultaneously increase consumption taxes so as not to lose government revenues. In this paper, we introduce a novel way of reducing tariff rates without losing revenues and without relying on consumption taxes. We propose that the home government imposes a per unit (or ad valorem) tariff 𝜏 and also auctions off a number of tariff exemptions. The foreign firms that submit the highest bids acquire the exemptions and sell their products in the home market without paying 𝜏 . The remaining foreign firms, i.e., those who do not acquire exemptions, remain subject to it. We identify market conditions under which this mechanism generates higher revenues for the home government (in comparison with traditional tariff policies) and also higher total home welfare. Among other things, our analysis implies that if the government wants to collect revenues of magnitude T(𝜏) , it can do so by announcing a lower tariff rate 𝜏 ′ < 𝜏 and by inviting the foreign firms to bid for tariff exemptions. Keywords Trade · Imperfect competition · Tariff · Exemption · Auction JEL Classification H25 · L13
1 Introduction The literature on tariff reforms often focuses on tariff reductions accompanied by consumption tax increases that do not reduce the revenues of the government and total welfare (see, for example, Hatzipanayotou et al. 1994; Keen and Ligthart 2002; Kreickmeier and Raimondos-Møller 2008). Using tariff-tax reform schemes that leave the market prices unchanged, the literature shows that the change in the policy mix leads to a win–win situation (both revenues and welfare go up). The goal of this
* Giorgos Stamatopoulos [email protected] 1
Department of Economics, University of Crete, 74100 Rethymno, Greece
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paper is to provide an alternative policy mechanism that uses only tariff rates and a tariff-exemption auction, without resorting to consumption taxes. Our motivation for suggesting the mechanism comes from a policy that various governments use when implementing trade restrictions: the auctioning of import licenses. Via this policy the government of the country that imposes quotas on trade can recover some of the rents associated with the restriction. The mechanism has been used by countries like Australia, New Zealand, etc. (see Tan 2001) and its success depends, among other things, on the structure of the product market. The mechanism’s theoretical aspects have been studied by Krishna (1988, 1991, 1993) and Tan (2001). Stimulated by the above, the current paper introduces a simple policy mechanism that works in parallel with the standard tariff policies. To elaborate, consider a good which is produced in the home country and also abroad. We propose that the government of the home country announces the follo
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