Tariff-Induced Licensing Contracts, Consumers’ Surplus and Welfare Revisited

In a trade model with technology transfer, Kabiraj and Kabiraj (2017) showed that a tariff on foreign products could induce fee licensing (with zero royalty) and maximize both consumers’ surplus and domestic welfare. In this paper, we show that if the foreign firm subsidizes the domestic firm’s production via negative royalty, a higher tariff can induce two-part tariff licensing contract, which results in higher consumers’ surplus and overall welfare. We also show that the optimal tariff might be negatively related to the technology gap, which does not appear in Kabiraj and Kabiraj (2017)