Optimal contracts for trade restrictions
Master of Arts
This paper addresses the question of how the government should elicit cost information from a high or low domestic industry to determine socially optimal levels of imports. The results are shown to depend on whether firms in the domestic industry are represented by a trade organization. When firms act independently the optimal contract is costless for the government and two different types of incentive constraints are used to determine it. One of these applies when the costs announced by firms coincide. The other applies when one firm reveals a cost structure and its competitor reveals the opposite cost structure. If a contract to elicit cost information is used and trade organizations are the channel of communication between industry and government only one type of incentive constraint is necessary.