Optimal Trade Policy and Compensation under Endogenous Uncertainty: The Phenomenon of Market Disruption

Bhagwati, Jagdish N.; Srinivasan, T. N.

The paper examines the nature of optimal policy intervention required in the exporting country when there is the possibility of a market-disruption-induced trade restriction being invoked by the importing country. The analysis is conducted primarily with a two-period model, with and without adjustment costs, and the results are related to the well-known policy prescriptions of Bhagwati, Ramaswami, Srinivasan, Johnson et al. in the theory of trade and welfare. The last section extends the argument briefly to steady state analysis. The applicability of the analysis to the symmetric, embargo problem is also noted.



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Journal of International Economics

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January 31, 2013