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Larch, Mario ; Lechthaler, Wolfgang:
Whom to send to Doha? The Short-sighted Ones!
In: Review of Economic Dynamics.
Bd. 16
(2013)
Heft 4
.
- S. 634-649.
ISSN 1094-2025
DOI: https://doi.org/10.1016/j.red.2012.10.006
Abstract
Why are empirically observed tariffs so much lower than theoretically calculated Nash-equilibrium tariffs? We argue that this gap can be narrowed by using a dynamic model instead of a static model. This approach has two advantages. (i) It allows us to take account of the transitional process after a change in tariffs. (ii) It allows us to take account of the shortsightedness of policy makers. We show that Nash-equilibrium tariffs based on a dynamic trade model are lower than Nash-equilibrium tariffs based on a static model. We also show that shortsighted politicians tend to set lower tariffs than politicians with a long planning horizon.