Whom to send to Doha? The shortsighted ones! |
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Authors: | Mario Larch Wolfgang Lechthaler |
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Institution: | 1. University of Bayreuth, Universitaetsstrasse 30, 95447 Bayreuth, Germany;2. Ifo Institute, Munich, Germany;3. CESifo, Munich, Germany;4. GEP, Nottingham, United Kingdom;5. Kiel Institute for the World Economy, Duesternbrooker Weg 120, D-24105 Kiel, Germany |
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Abstract: | Analyses of the effects of trade policies focus on comparisons of two different steady states, restricting the investigation to the long run. In order to account for the adjustments and to capture the relevant transmission mechanisms of changes in trade costs, such as market size, entry and exit, as well as productivity changes of firms, we base our trade policy analysis on a dynamic new trade theory model. This approach has two advantages. (i) It allows us to take account of the transitional process after a change in tariffs. (ii) It allows us to take account of the shortsightedness of policy makers. We show that Nash-equilibrium tariffs based on a dynamic trade model are lower than Nash-equilibrium tariffs based on a static model. We also show that shortsighted politicians tend to set lower tariffs than politicians with a longer planning horizon. |
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