Quantitative Restrictions in the Presence of Cost-Based Informational Asymmetries

This study introduces a cost-based informational asymmetry into a two-period model where a domestic (incumbent) firm’s behavior in the first period affects the entry decision of a foreign firm in the second period. The effects of import quota policy within this environment are examined and compared to the standard, full-information effects. When quota quantities are set exogenously, the standard effects of quota policy may be significantly altered depending on whether or not policy induces the domestic firm to signal cost structure. For example, higher quotas may discourage foreign entry because of the induced signaling effects of quota policy.