A Game Theoretical Analysis of Tariffs

Abstract

In this literature review, I examine the application of international tariff interactions in the framework of game theory. I aim to analyse the ability of such models to explain the key aspects of these strategic international relations. I take into account structure such as timing, number and type of players, informational assumptions, payoffs, and equilibrium outcomes. Through a thorough comparison of literature discussed in this paper, it is found that tariff interactions are best classified as two-player sequential and repeated games, in which payoffs capture tariff-relevant welfare motivations and political pressures. Moreover, it is found that tariff relations can be classified as either cooperative or non-cooperative, indicating the presence of a trade agreement and potential to negotiate, or the lack thereof. Equilibrium outcomes vary in either setting.