Information and Disclosure in Strategic Trade Policy

We relax the standard assumption in the strategic trade policy literature that governments possess complete information about the economy. Assuming instead that governments must obtain information from firms, we examine firms' incentive to disclose information to the governments in the Brander-Spencer setting. With quantity competition, we find firms disclosing both demand and cost information, thereby justifying the literature's omniscient-government assumption. With price competition, however, firms have no incentives to disclose demand or cost information, so governments remain uninformed. Further, with quantity competition and unknown demand, governments are caught in an informational prisoner's dilemma.

Endogenous Entry in Markets with Adverse Selection

Since Akerlof's (1970) seminal paper the existence of adverse selection due to asymmetric information about quality is well-understood. Yet two questions remain. First, given the negative implications for trading and welfare, how do such markets come into existence? And second, why have many studies failed to find direct or indirect evidence of adverse selection? In addressing the first question directly we shed some light on the second. We consider a market in which firms make an observable investment that generates products of a quality that becomes known only to the firm. Entry has the tendency to lower prices, which may lead to adverse selection. The implied price collapse limits the amount of entry so that high prices are supported in the market equilibrium, which results in above normal profits. While contributing to our understanding of markets with asymmetric information and adverse selection, the model also provides insight into the question of why markets with adverse selection are empirically hard to identify. The analysis suggests that rather than observing the canonical market collapse, such markets are instead characterized by less entry than would be empirically predicted and above normal profts even in markets with low measures of concentration.adverse selection, asymmetric information, entry, entry barriers, investment

Export, Foreign Direct Investment, and Joint Ventures: Learning the Rival's Costs through Propinquity

We examine the role of cost uncertainty in a firm's choice between exporting and foreign investment in oligopolistic industry. We consider both foreign direct investment and an international joint venture, and allow country-specific and firm-specific cost uncertainty. Unlike exporting, either form of foreign investment exposes home and foreign firms to common country-specific cost shocks, implying a better knowledge of each other's country-specific shocks. Further, a joint venture allows the firms to learn each other's firm-specific cost. A firm's plant location decision depends on the interaction of these two effects, which depend on the type of competition and the substitutability of the firm's products.

The Profitable Suppression of Inventions: Technology Choice and Entry Deterrence

AT&T was known for both funding a world-class research lab and delaying deployment of useful innovations from the lab. To explain this behavior we consider a model with an incumbent facing a potential entrant. The incumbent can choose from two technologies for production: old and new. The entrant's choice is limited to the old. We show that, under correlated production uncertainty, use of the common technology exposes the entrant to a greater risk. Therefore, the incumbent may suppress a newer, more efficient technology in favor of the old as a means to deter entry.

A Note on Socially Insufficient Advertising in Tirole’s Duopoly Model

In his textbook Tirole (1988, pp. 291-294) presents a model of advertising with Hotelling duopolists. A condition for there to be socially too little advertising is derived

Measuring Financial Development in the Middle East and North Africa: A New Database

This paper develops a methodology to construct detailed indices of financial sector development across countries and uses it to create a new panel database of finan-cial sector development in Middle East and North Africa (MENA) countries. It combines existing quantitative data with information from comprehensive surveys undertaken in 2000-01 and 2002-03. The data show that some MENA countries have relatively well-developed banking sectors and regulatory and supervisory regimes. However, across the region, the nonbank financial sectors and sup-porting institutions are in need of reform. The MENA region ranks far behind industrialized countries and East Asia in financial sector development. Copyright 2006, International Monetary Fund