When Government Misleads US: Sending Misinformation as Protectionist Devices

Abstract

In this paper, we examine the incentive of the home government to mislead home consumers by sending misinformation. We nd that positive misinformation on home products and negative misinformation on foreign products always increases the prot of the home rm, while when the marginal costs of home and foreign rms are the same, a small amount of positive misinformation decreases the consumer surplus. Moreover, when the home government maximizes home welfare, it chooses to send positive misinformation on the home product and negative misinformation on the foreign product. The stronger is the competition faced by the home rm, the greater is the amount of negative misinformation on the foreign product. By contrast, the optimal amount of misinformation on each product used to maximize world welfare is positive. We also demonstrate that trade liberalization can increases the incentive of the home government to send misinformation.Strategic misleading, misinformation, non-tari trade policies