Anti-Dumping and Lobbying: a Signaling Game Approach

This paper analyzes the relationship between domestic firms and an international trade agency which is empowered by the legislative body to administer antidumping laws against possible predatory behavior of foreign firms in domestic markets. In order to focus on the domestic firm-agency interaction, we “control” for the foreign firm’s behavior by assuming that it preys only on relatively low efficiency domestic firms. Accordingly, an informed and benevolent agency provides selective protection through the antidumping procedure to those vulnerable firms only. We build into the model two features that allow us to examine situations that may not correspond to this socially desirable way of implementing the antidumping procedure. First, we introduce asymmetric information on the existence of predatory behavior by assuming that the agency makes its decision on the basis of an output signal by the domestic firm. Second, we introduce lobbying by the domestic firm as a monetary instrument of direct influence of the agency’s decision, taking into account the informational externality it has on the agency’s beliefs. The equilibrium results derived in this paper contribute, from a positive economics standpoint, to the controversial debate on the extent of discretionary power of international trade agencies in the way they administer antidumping laws.