STRATEGIC TRADE-POLICY WITH INCOMPLETELY INFORMED POLICY-MAKERS

We investigate the implications of incomplete information for a simple , rent-shifting trade policy a la Brander and Spencer (Journal of Inte rnational Economics, 1985, 18, 83-100). Asymmetric information undermi nes the precommitment effect of unilateral government intervention, du e to the requirements of incentive compatibility. This 'screening' eff ect induces a downward distortion in the optimal subsidy, which may re quire a tax rather than a subsidy for the least efficient firms. The i ntroduction of a rival interventionist government countervails the scr eening effect. Finally, we introduce a nonintervention-profit particip ation constraint. In this case, the government targets the efficient f irms with positive subsidies, and eschews intervention for the least e fficient firms. (C) 1997 Elsevier Science B.V.