The Theory of Optimal Delegation With an Application to Tariff Caps

Authors

  • Manuel Amador,

    1. Dept. of Economics, Stanford University, Stanford, CA 94305, U.S.A.; amador@stanford.edu
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  • Kyle Bagwell

    1. Dept. of Economics, Stanford University, Stanford, CA 94305, U.S.A.; kbagwell@stanford.edu
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    • A previous version of this paper was circulated under the title “On the Optimality of Tariff Caps.” We would like to thank Jonathan Eaton, Alex Frankel, Bengt Holmstrom, Petros Mavroidis, John McLaren, John Morrow, Ilya Segal, Robert Staiger, Bruno Strulovici, Alan Sykes, Juuso Toikka, Ivan Werning, and Robert Wilson for fruitful comments and suggestions. We also would like to thank participants at several seminars and conferences. Peter Troyan provided excellent research assistance. We also thank the editor and three anonymous referees. Manuel Amador acknowledges NSF support.


Abstract

We consider a general representation of the delegation problem, with and without money burning, and provide sufficient and necessary conditions under which an interval allocation is optimal. We also apply our results to the theory of trade agreements among privately informed governments. For both perfect and monopolistic competition settings, we provide conditions under which tariff caps are optimal.

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