This study introduces a cost-based informational asymmetry into a two-period signaling model. We examine the effects of import tarifpolicy within this environment of incomplete information and compare them to the standard, full information effects. When tariff rates can be credibly fixed, the standard effects of tarflpolicy may be signi3cantly altered. For example, lower tariffs may discourage foreign entry because of the induced signaling effects of tarifSpolicy. Moreover; because the impact of tariff policy depends on the cost structure of domestic firms, uninformed policymakers will not be able to predict the qualitative effects of tariff policy. (JEL F12, F13)

The paper demonstrates that the standard prediction on the relation between tariff rates and the mode of foreign entry-exports or direct investment-may not hold in the presence of incomplete information. A foreign firm lacks full information on the cost structure of an informed incumbent firm located in the domestic (potential) host country. Within a two-period model, the local incumbent may behave in a manner which keeps the potential foreign entrant uninformed of its cost structure. In such a pooling equilibrium, the uninformed foreign firm either refrains from entering altogether or serves the host country via exports at tariff rates which would, otherwise under complete information, induce entry via direct investment. When entry mode is altered, other standard full-information effects of trade policy may also no longer hold. Copyright Blackwell Publishing Ltd 2003.

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In a monopoly market for an experience good the diflusion of product-quality information may depend on whether or not the information is favorable.To capture this asymmetty, our model uses as its information source a quality survey which sufsers from response bias. Consumers may attempt to adjust for bias, but are not required to do so correctly. As a result, quality under perfect information need not be, and usually will not be, higher than quality under imperfect information. In addition, the externality exerted by informed consumers on uninformed consumers may not be the traditional beneficial externality. (JEL L15) 1. Kernell's [I9771 work on negative voting suggests that a displeased consumer would be more likely to respond, while the positivity bias described by social psychologists Bruner and Tagiuri [ 19541 and Sears and Whitney [I9731 suggests the opposite outcome. The marketing literature takes no definite position on the direction of the bias, but rather concentrates on methods of increasing the proportion responding and the accuracy of those responses. See Yammarino et al., [ 19911, Haggett and Mitchell [ 19941, and Greenleaf [ 19921 for recent developments. The model developed here allows for response bias in either direction. 2. Response bias is often difficult to detect and costly to correct for. See Kott [I9871 and Bradburn [I9831 for methods of discovering and correcting response bias. 3. Horton [I9911 reports that both Lexus and Infinity have stated publicly their intentions to set a new standard in the Power customer satisfaction survey, while Peterson, Wilson and Brown [I9921 disclose that sales of Buick Le-Sabres allegedly rose 62% afier advertising its high Power ratings.