Evaluation of Government Behavior in Import Tariff Policies: An Application of Game Theory

Document Type : Research Paper

Authors

1 Assistant Professor, Tarbiat Modares University

2 . Ph.D. Student of Economics – Tarbiat Modares University

3 MSc of Economics

Abstract

This paper attempts to appraise import tariffs as a trade policy in Iran by designing a game. The game belongs to non-cooperative static games with no zero sums. The government and the importer are the two players of the game each of whom has two strategies. The strategies of the government are increasing the tariffs or preventingthe expenditures. The strategies of the importer are proportional increase in formally registered imports or proportional increase in informal imports. It is assumed that the interests of the two players are opposite and there is no cooperation between them. The government plays a leading role and, thus, assessing theimporter's behavior and maintaining the game equilibrium depend on the government's decisions. Assuming a 2-digit inflation and extra stability of exchange, the initial results of the game show that the government sets tariffs and prevention expenditures so that itsearnings from the import stream maybe maximized.
At last, it has been shown that the initial equilibrium is not an optimum status and the government can promote its own earnings and social welfare functions by decreasing its safeguard policies on the exchange rate and letting a decrease in the value of the national currency. This strategy leads to a decrease of informal import and promotion of competition power of domestic industries as to increasethe government earnings.

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