Optimal Timing of Import Liberalization under Uncertainty: Foreign Goods Consumer Surplus and Option Value of Waiting

This paper examines the optimal timing of import liberalization under uncertainty. We develop a partial-equilibrium model in which a government chooses when to allow imports from a foreign firm, facing an irreversible liberalization cost and stochastic evolution of domestic production costs. Welfare before and after liberalization admits closed-form expressions, allowing trade liberalization to be formulated as an optimal stopping problem. The model yields an explicit threshold rule for liberalization. A key result is that a larger consumer surplus generated in the foreign goods market after liberalization delays the optimal timing of opening. By increasing the option value of waiting, foreign-market surplus can rationalize delayed liberalization even when domestic costs are expected to deteriorate. The analysis provides a unified perspective on the infant industry argument and real options theory.