International trade, minimum quality standards and the prisoners' dilemma
By: Dimitra  Petropoulou.
Contributors: London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper -- no. 858
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2008
Place of publication: London
Language: eng
Format: Electronic resource
Description: 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.
Notes: Title from PDF file (viewed on Oct. 10, 2008).

"February 2008."

Includes bibliographical references.

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