Manipulable behavior in international trade

In this paper, we present a Cournot duopoly model to analyze the manipulated behavior in international trade. The WTO is assumed as an arbitrator for the exchange in an oligopolistic industry and sets tariff rules according to the SDT principles; a firm's cost is private information both for the WTO and the foreign rivalries. Subsequent to our analysis of several cases we find that a firm may misreport to the WTO for more production revenue and the government may collude with a firm for higher welfare. It is shown that the misreporting and collusion incentives are related to the WTO tariff rule, the misreported cost and market size. Furthermore, a strategy proof tariff rule has been designed in which firms can never make his revenue better off by misreporting production cost.

Research Highlights► Investigates strategic trade policy in context of WTO policy setting. ► Examines the existence of manipulable behavior under the SDT principles. ► Designs a strategy proof tariff rule to discourage the misreporting incentives.