DP4643 | Innovative (Imitative) Effort and Tariffs in Developing Countries: Policy Implications of Different Market Conducts, Government Commitment Levels, and Information (A)symmetries

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We analyse a simple ?tariffs-cum-foreign competition? policy targeted at enhancing the competitive position of a domestic, developing country firm that competes with its developed country counterpart on the domestic market and that carries out innovative (imitative) effort. We evaluate this policy with respect to social welfare, type of oligopoly conduct, information requirement, time consistency and possibility of manipulative behaviour and conclude that the most robust policy set-up is that in which the domestic government is unable to pre-commit to the level of its policy. Finally, we examine this policy, allowing for asymmetric information, and show that the corresponding social welfare may be higher than under perfect information set-up.