STRATEGIC TRADE-POLICY DESIGN WITH ASYMMETRIC INFORMATION AND PUBLIC CONTRACTS

This paper examines strategic trade policy under asymmetric informatio n with publicly observable contracts. We analyse both the cases of uni lateral and bilateral intervention. We find that the requirement of in centive compatibility undermines the strategic precommitment effect wh en public funds are costly, even with no restrictions on the form of t he policies. Second, when firms sell substitute goods, the introductio n of a rival interventionist government may reduce the cost of informa tional rents to each government. Third, it turns out that under bilate ral intervention there exists a continuum of symmetric equilibria with levels of output and corresponding levels of welfare in the exporting countries which can be ranked. The requirement of ex post participati on constraints for the firm limits the set of subsidies which can be o ffered to the firm. In particular, under bilateral intervention, the e quilibrium levels of output which are implemented under adverse select ion are below their values under ex ante uncertainty, i.e., below the equilibrium levels of output which are achieved when firms sign their contracts before the realization of their costs.