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International trade, minimum quality standards and the prisoners' dilemma

Petropoulou, Dimitra (2008) International trade, minimum quality standards and the prisoners' dilemma. CEPDP, 858. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853282525

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Abstract

Unilateral minimum quality standards are endogenously determined as the outcome of a non-cooperative standard-setting game between the governments of two countries. Cross-country externalities from the implementation of minimum quality standards are shown to give rise to a Prisoners' Dilemma structure in the incentives of policy-makers leading to inefficient policy outcomes. The role of minimum quality standards as non-tariff barriers is examined and the scope for mutual gains from reciprocal adjustment in minimum standards analysed. The analysis delivers four results. First, there exist four unregulated Nash equilibria in minimum standards, two symmetric and two asymmetric, depending on the quality ranking of firms in each market. The analysis establishes that in all four cases, unilaterally selected minimum quality standards are inefficient as a result of cross-country externalities. Second, minimum quality standards are shown to operate as non-tariff barriers to trade. Third, the world welfare maximising symmetric standard can be reached through reciprocal adjustments in national minimum standards from either of the two symmetric Nash equilibria. Finally, the scope for mutually beneficial cooperation is shown to be significantly restricted when cross-country externalities are asymmetric. Asymmetric externalities make a cooperative agreement at the world optimum infeasible.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2008 Dimitra Petropoulou
Library of Congress subject classification: H Social Sciences > HF Commerce
Journal of Economic Literature Classification System: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
F - International Economics > F1 - Trade > F19 - Other
F - International Economics > F1 - Trade > F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 858
Date Deposited: 18 Jul 2008 09:48
URL: http://eprints.lse.ac.uk/19626/

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