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on International Trade |
| By: | Jung, Benjamin |
| Abstract: | China's accession to the World Trade Organization (WTO) in 2001 was a massive boostfor the multilateral trading system. We present descriptive evidence on the trade effects of China's WTO accession. Moreover, we combine the most recent approaches from the gravity literature of international trade to provide a causal analysis of the effects of China's WTO accession on bilateral trade with other WTO members. We find that the trade effectis positive on average. Moreover, we document substantial heterogeneity in the trade effects across China's trading partners. These findings seem to be consistent with China's position in global value chains. |
| Keywords: | GATT/WTO,China,international trade,structual gravity |
| JEL: | F13 F14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hohdps:102020&r=all |
| By: | Liu, Nan |
| Abstract: | From 2018 through 2019, the United States and China imposed a series of wide-ranging increases in import tariffs which have dramatically raised trade barriers between the two largest economies in the world. With a focus on the import side, this paper provides evidence on the impact of the trade war on China's trade quantities and prices, and estimates related trade elasticities. Both Chinese import quantities and values dropped sharply following the tariffs and there is evidence for incomplete pass-through of Chinese import tariffs in the very short run. More importantly, this paper shows that while China's non-processing imports declined dramatically during the trade war, the processing imports almost remain un-affected. The results suggest that the Chinese special duty-free policy on processing trade may have served as a built-in mechanism to better protect domestic firms from the damage of the trade war through the global value chain channel. |
| Keywords: | Trade war; Tariff; China; Processing trade; Global value chain |
| JEL: | F10 F13 F14 |
| Date: | 2020–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:103929&r=all |
| By: | Andre Jungmittag (European Commission - JRC); Robert Marschinski (European Commission - JRC) |
| Abstract: | We study the impact of service trade restrictions on bilateral greenfield FDI projects in four different business services sectors within a gravity model framework. Project level FDI data for 42 destination countries and up to 41 source countries spanning the years 2014 to 2018 is taken from the fDi Markets database, and restrictions from the OECD’s Service Trade Restrictiveness Index (STRI). Using a negative binomial estimator to explain the number of bilateral FDI projects, we find that service trade restrictions represent a significant barrier for greenfield FDI. In 3 out of 4 business services, we obtain statistically significant evidence of a negative impact. Furthermore, the explanatory power of the models generally improves when using the sub-components of the STRI (restrictions to foreign entry, restrictions to the movement of people and other service trade restrictions), instead of the single aggregated index value. Based on the estimated impacts of the different restrictions, we carry out a series of simple simulations of how the number of expected FDI projects would increase in response to a hypothetical policy reform, and propose some sector-specific policy recommendations. |
| Keywords: | Economic integration, service trade, foreign direct investment, business services, service trade restrictions, count data model, gravity model, greenfield investment, professional services, regulatory restrictions, investment restrictions |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc122116&r=all |
| By: | Caio Torres Mazzi; Gideon Ndubuisi; Elvis Avenyo |
| Abstract: | Using the South African Revenue Service and National Treasury firm-level panel data for 2009-17, this paper investigates how global value chain-related trade affects the export performance of manufacturing firms in South Africa. In particular, the paper uses extant classifications of internationally traded products to identify different categories of global value chain-related products and compares the productivity premium of international traders for these different categories. |
| Keywords: | Global value chains, Learning by exporting, Productivity, South Africa |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2020-145&r=all |
| By: | Saad Ahmad; Nuno Limão; Sarah Oliver; Serge Shikher |
| Abstract: | We estimate the impact of increased policy uncertainty from Brexit on UK trade in services. We apply an uncertainty-augmented gravity equation to UK services trade with the European Union at the industry level from 2016Q1 to 2018Q4. By exploiting the variation in the probability of Brexit from prediction markets interacted with a new trade policy risk measure across service industries we identify a significant negative impact of the threat of Brexit on trade values and participation. The increased probability of Brexit in this period lowered services exports by at least 20 log points. |
| JEL: | F02 F13 F14 L8 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28053&r=all |
| By: | Janeba, Eckhard; Schulz, Karl |
| Abstract: | We develop a theory of economic disintegration that features both endogenously formed tax and trade policies. We show very generally that the economic disintegration of a country from an economic union leads to a deeper integration of international trade institutions. Moreover, we set up a multi-country, multi-sector general equilibrium trade model with internationally mobile firms. We address the key dimensions of economic disintegration, such as tariffs, non-tariff barriers, the harmonization of production standards and regulations, as well as household migration and analyze their effects on the domestic tax policies of asymmetric countries. |
| Keywords: | Trade Policy,Tax/Subsidy Competition,Oligopolistic Markets,Economic Integration |
| JEL: | F13 F15 F22 F53 H25 H73 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224544&r=all |
| By: | Schopf, Mark |
| Abstract: | The present paper analyzes the impact of a climate coalition's border carbon adjustment on emissions from commodity production, welfare and the coalition size. The coalition implements border carbon adjustment to reduce carbon leakage and to improve its terms of trade, while the fringe abstains from any trade policy. With symmetric countries, the optimal import tax or export subsidy is positive but smaller than the coalition's implicit emission price. With a linear-quadratic specification, the coalition exports the commodity. Total emissions decrease with the coalition size, and total welfare increases [decreases] with the coalition size if the coalition is large [small]. Then, the reduced climate costs outweigh [are outweighed by] the increased trade distortions. The unique stable coalition consists of three or more countries, including the grand coalition, and raises the welfare of each country compared to the business-as-usual equilibrium. If no [each] country implements a trade policy, the stable coalition consists of two [three] or less countries. Compared to the case in which only the coalition implements border carbon adjustment, the welfare of each country is reduced [if the stable coalition then consists of four or more countries]. All results are derived analytically. |
| Keywords: | Carbon Leakage,Climate Change,Environmental Policy,Nash Equilibrium,Terms of Trade |
| JEL: | F13 F18 H23 Q54 Q56 Q58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224560&r=all |
| By: | Jasper Verschuur; Elco Koks; Jim Hall |
| Abstract: | The implementation of large-scale containment measures by governments to contain the spread of the COVID-19 virus has resulted in a large supply and demand shock throughout the global economy. Here, we use empirical vessel tracking data and a newly developed algorithm to estimate the global maritime trade losses during the first eight months of the pandemic. Our results show widespread trade losses on a port level with the largest absolute losses found for ports in China, the Middle-East and Western Europe, associated with the collapse of specific supply-chains (e.g. oil, vehicle manufacturing). In total, we estimate that global maritime trade reduced by -7.0% to -9.6% during the first eight months of 2020, which is equal to around 206-286 million tonnes in volume losses and up to 225-412 billion USD in value losses. The fishery, mining and quarrying, electrical equipment and machinery manufacturing, and transport equipment manufacturing sectors are hit hardest, with losses up to 11.8%. Moreover, we find a large geographical disparity in losses, with some small islands developing states and low-income economies suffering the largest relative trade losses. We find a clear negative impact of COVID-19 related business and public transport closures on country-wide exports. Overall, we show how real-time indicators of economic activity can support governments and international organisations in economic recovery efforts and allocate funds to the hardest hit economies and sectors. |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2010.15907&r=all |
| By: | Genthner, Robert; Kis-Katos, Krisztina |
| Abstract: | Using yearly Indonesian labor market data for 2000 to 2015, we investigate the impact of a protectionist foreign direct investment (FDI) policy reform on employment and wages. The so-called negative investment list regulates FDI at the highly granular product level and has been repeatedly revised throughout time. We construct spatial measures of regulatory penetration based on firm-level data and thereby exploit the exposure of local manufacturing industry employment to the negative investment list. Controlling for time and locality fixed effects as well as trends in initial district conditions, our findings suggest an overall positive effect of local regulatory penetration on employment, which is especially pronounced among young, females and low-skilled workers and mostly driven by job creation in the manufacturing sector. We also present evidence in support of positive wage effects. |
| Keywords: | FDI regulation,Indonesia,local labor markets |
| JEL: | F16 F21 F23 J23 J31 L51 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224524&r=all |
| By: | Okotori, Tonprebofa, Waikumo; Ayunku, Peter, Ego |
| Abstract: | In this paper using monthly data for the period 1981-2018, we adopted VARmethodology to show the nexus of foreign direct investment(FDI), the exchange rate (EXR), and net exports in order to reveal the effect of one variable on the other. Granger causality test, impulse response functions as well as block wald/exogeneity were used to test the given hypothesis. The results show that FDI did not granger cause exchange rate (EXR), but exchange rate granger causes exchange rate volatility, but the exchange rate does not granger cause net exports and that net exports granger causes FDI, the FDI was found to granger net exports. The policy implication for the CBN can be seen in the fact that undermanaged capital flows and managed exchange rate regimes the bank might choose to influence growth in sectors of the economy such as the financial markets. It might not be certain that the CBN cannot thus operate an independent monetary policyasthecoreprescriptionsoftheMundell -Flemingmodelhavebeenbreached. |
| Keywords: | Foreign direct investment, VAR, CBN, Mundell-Fleming |
| JEL: | E58 E61 E65 E66 F62 N27 O16 O24 |
| Date: | 2020–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:103880&r=all |
| By: | Felbermayr, Gabriel; Steininger, Marina |
| Abstract: | When, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct an ex post evaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively. |
| Keywords: | Euro,trade,general equilibrium,quantitative trade models,European Union |
| JEL: | F15 F17 N74 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkie:225299&r=all |
| By: | Winkler, Erwin |
| Abstract: | This paper provides evidence that labor reallocation from the manufacturing into the non-manufacturing sector causes an increase in sorting of high-skilled (low-skilled) workers into high-paying (low-paying) firms and thereby triggers a rise in wage inequality. I use data on 50% of all West German male employees and exploit industry-level variation in trade-induced labor reallocation into the non-manufacturing sector, stemming from Germany's trade integration with China and Eastern Europe. The results suggest that labor reallocation into the non-manufacturing sector causes an increase in sorting because low-educated workers performing routine and codifiable tasks are less likely to move to high paying service firms than more skilled workers. These results are not specific to trade-induced labor reallocation, but carry over to any shock or policy which causes a contraction of the manufacturing sector and labor reallocation into the service sector. A back-of-the-envelope calculation suggests that total observed labor reallocation into the non-manufacturing sector explains at least 30% of the rise in sorting and 10% of the rise in wage inequality between 1990 and 2010 in Germany. |
| Keywords: | Labor reallocation,wage inequality,sorting,firms,international trade |
| JEL: | J31 J62 F14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224535&r=all |
| By: | Chowdhry, Sonali; Felbermayr, Gabriel; Hinz, Julian; Kamin, Katrin; Jacobs, Anna-Katharina; Mahlkow, Hendrik |
| Abstract: | Military interventions and economic sanctions are increasingly seen as strategic substitutes for achieving national and global security objectives, both impose economic costs. We quantify the lower bound of the costs of sanctions using a gravity model of international trade and a general equilibrium simulation model. We find that sanctions amount to a loss in GDP of about 34 billion USD in 2019/2020 for the sanctioning NATO countries collectively, but the costs of sanctions are very unevenly distributed. No other country contributes as much as Germany (8.1 billion USD), while the costs for the US amount to 2.6 billion USD. Accounting for sanctions, countries' contributions to global security as a share of GDP are closer to the 2% NATO target than a narrow focus on military expenditure alone would suggest. Hence, there is less free-riding than some observers suspect. |
| Keywords: | sanctions,NATO,trade policy,global security,Sanktionen,NATO,Handelspolitik,globale Sicherheit |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkpb:147&r=all |
| By: | Steven Brakman; Tijl Hendrich; Charles van Marrewijk; Jennifer Olsen |
| Abstract: | The trade literature often treats countries as dimensionless points, which is a strong assumption. Agglomeration or lumpiness of production factors within countries can affect the national pattern of trade. In this paper we analyze comparative advantage patterns for 22 cities and 4 regions for (a selection of) 83 sectors within The Netherlands. Our findings are as follows. First, analysis of the lens condition indicates that the regional concentration of production factors (lumpiness) does not affect the Dutch national trade pattern. This suggests that the mobility of firms and factors of production is consistent with the so-called welfare maximizing integrated equilibrium. Second, despite the fact that the lens condition is verified, comparative advantage patterns across locations differ significantly from each other. We show this by comparing location specific distributions of the Balassa-Index (BI). Third, the differences across locations of comparative advantage patterns is determined by the interaction of local skill-abundance and sector skill-intensity, in line with the predictions of the factor abundance model. Moreover, at the sectoral level, location-specific variables such as market access or density, have limited effects. Fourth, most locations that house sectors that have a strong comparative (dis-) advantage relative to the Netherlands also have a strong comparative (dis-) advantage relative to the world. Only a few locations house sectors that are locally strong, but globally weak, and vice versa. The results indicate that international trade policies and disputes, such as Brexit or the US-China trade war, can have strong local consequences. |
| Keywords: | comparative advantage, cities, Heckscher-Ohlin, factor abundance |
| JEL: | F11 F15 R12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8649&r=all |
| By: | Kerem Coşar; Benjamin D. Thomas |
| Abstract: | Motivated by the historically tense geopolitical situation in Southeast Asia, we simulate the potential closure of key maritime waterways in the region to predict the impact on trade and welfare. We generate initial (unobstructed) and counterfactual (rerouted) least-cost maritime paths between trading countries, and use the distances of these routes in a workhorse model of international trade to estimate welfare effects. We find heterogeneous and economically significant reductions in real GDP, and show the magnitude of welfare loss is directly correlated with military spending as a proportion of GDP, suggesting nations may be responding to economic security threats posed by such potential conflicts. |
| JEL: | F14 F5 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28048&r=all |
| By: | Arun Advani; Felix Koenig; Lorenzo Pessina; Andy Summers |
| Abstract: | In this paper we study the contribution of migrants to the rise in UK top incomes. Using administrative data on the universe of UK taxpayers we show migrants are over-represented at the top of the income distribution, with migrants twice as prevalent in the top 0.1% as anywhere in the bottom 97%. These high incomes are predominantly from labour, rather than capital, and migrants are concentrated in only a handful of industries, predominantly finance. Almost all (85%) of the growth in the UK top 1% income share over the past 20 years can be attributed to migration. |
| JEL: | H20 J30 J60 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8665&r=all |
| By: | Meyer, Birgit |
| Abstract: | Global Value Chains (GVCs) provide an important opportunity to become member of the global economy. Gaining access to GVCs and the possibility of developing linkages with major suppliers and customers enables the prospect to upgrade products and production processes via knowledge and technological spillovers, learning by doing and the allocation of new task. Adopting new production technologies and realizing synergy effects might allow cost reduction, product innovation and product upgrading. Even if GVCs represent a rich environment for innovation activities, the extent to which knowledge is created and transferred among firms may vary considerably across their mode of participation in the global chain, thus resulting in heterogeneous innovation capacities for the firms involved. Differences in the forms of governance underlying buyer-supplier relationships - for instance linked to dissimilar power asymmetries and firm capability - can strongly affect the knowledge transmission along the chains and are potentially able to explain heterogeneities in firms' innovation propensity. Using a firm-product-level dataset of Indian manufacturing firms including information on business groups, this paper contributes to recent studies on international production and GVCs by testing the effect of different modes of internationalization on firms' upgrading activities, including the extensive and intensive margins of innovation and R&D expenditures. Controlling for the selection bias associated with the chosen mode of internationalization and accounting for potential reverse causality, this paper shows that the deeper firms are integrated internationally, the higher the likelihood that they engage in innovation activities. Firms which have a high mode of internationalization are not only more productive, but also more likely to introduce new products, upgrade existing products and produce more sophisticated products than firms that are less engaged in international markets and, thus, less prone to international competition. |
| Keywords: | Global value chain,exporting,importing,FDI,innovation,upgrading |
| JEL: | F23 F61 O31 D22 L23 F14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224584&r=all |
| By: | Slavtchev, Viktor; Bräuer, Richard; Mertens, Matthias |
| Abstract: | This study analyzes empirically the effects of import competition on firm productivity (TFPQ) using administrative firm-level panel data from German manufacturing. We find that only import competition from high-income countries is associated with positive incentives for firms to invest in productivity improvement, whereas import competition from middle- and low-income countries is not. To rationalize these findings, we further look at the characteristics of imports from the two types of countries and the effects on R&D, employment and sales. We provide evidence that imports from high-income countries are relatively capital-intensive and technologically more sophisticated goods, at which German firms tend to be relatively good. Costly investment in productivity appears feasible reaction to such type of competition and we find no evidence for downscaling. Imports from middle- and low-wage countries are relatively labor-intensive and technologically less sophisticated goods, at which German firms tend to generally be at disadvantage. In this case, there are no incentives to invest in innovation and productivity and firms tend to decline in sales and employment. |
| Keywords: | productivity,multi-product firms,import competition |
| JEL: | F14 L25 D22 D24 F61 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224563&r=all |
| By: | Naudé, Wim (RWTH Aachen University) |
| Abstract: | Industrialization is vital for inclusive and sustainable global development. The two engines of industrialization – innovation and trade – are in danger of being compromised by the COVID-19 pandemic, under conditions increasingly reminiscent of the medieval world. It comes at a time when innovation had already been stagnating under guild-like corporate concentration and dominance, and the multilateral trade system had been buckling under pressure from a return to mercantilist ideas. The COVID-19 pandemic may cause a permanent reduction in innovation and entrepreneurship and may even bring the 4th industrial revolution (4IR) to a premature end. Hence the post-COVID-19 world may be left with trade as the only engine for industrialization for the foreseeable future. If the global community fails to fix the multilateral trade system, the world may start to resemble the Middle Ages in other, even worse, aspects. |
| Keywords: | industrialization, development, trade, innovation, COVID-19, industrial policy |
| JEL: | F01 F13 L26 L52 O25 O30 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13829&r=all |
| By: | Vanessa Alviarez; Keith Head; Thierry Mayer |
| Abstract: | We assess the consequences for consumers in 76 countries of multinational acquisitions in beer and spirits. Outcomes depend on how changes in ownership affect markups versus efficiency. We find that owner fixed effects contribute very little to the performance of brands. On average, foreign ownership tends to raise costs and lower appeal. Using the estimated model, we simulate the consequences of counterfactual national merger regulation. The US beer price index would have been 4-7% higher without divestitures. Up to 30% savings could have been obtained in Latin America by emulating the pro-competition policies of the US and EU. |
| Keywords: | mergers;markups;globalisation;competition |
| JEL: | F12 F23 L13 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2020-13&r=all |
| By: | Kauppinen, Ilpo; Poutvaara, Panu |
| Abstract: | Are migrants self-selected and sorted according to their views about what constitutes a fair level of redistribution? A major challenge in answering this question is that fairness concerns and self-interest are intertwined. We present a theoretical framework that allows us to test whether migrants self-select and sort themselves according to fairness concerns, in addition to financial self-interest. Our empirical analysis uses our own survey data on Danish emigrants to various destinations, combined with full-population administrative data and survey data on Danes living in Denmark. To exclude the role of financial self-interest, we focus on emigrants' attitudes towards redistribution in Denmark where they no longer pay taxes or receive transfers. We find strong support for the hypothesis that migrants self-select and sort themselves according to their views about what constitutes a fair level of redistribution among men, but not among women: the majority of men who emigrate are more negative towards redistribution in Denmark than non-migrants, while the opposite pattern prevails among women. The stark gender difference remains when solely looking at those who emigrated for work reasons. |
| Keywords: | Migration,Emigration,Welfare state,Redistribution,Political preferences |
| JEL: | F22 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224599&r=all |
| By: | Prentice, Barry E.; Guzman, Herman |
| Keywords: | Public Economics |
| Date: | 2020–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ctrf29:306054&r=all |
| By: | Andreas Eisl (CEE - Centre d'études européennes et de politique comparée - CNRS - Centre National de la Recherche Scientifique - Sciences Po - Sciences Po); Eulalia Rubio |
| Abstract: | This policy brief develops two possible scenarios (closer vs. looser cooperation) of a future EU–UK economic relationship. After analysing how they fit into the existing EU landscape of external differentiation, it assesses these two scenarios in terms of effectiveness – defined as the capacity to reduce economic disruption – and their potential effects on the EU's political unity. The paper concludes that the scenario of closer cooperation is superior in its capacity to minimise economic harm both for the UK and for the EU, and to provide a climate for long-term economic cooperation. Regarding the impact on EU cohesiveness, we contend that the biggest threat to its unity would be an "unbalanced" agreement providing a level of advantages not matched with a corresponding set of obligations. This could spark desires for more differentiation among EU member states and trigger third-country demands to renegotiate existing EU regimes of external differentiation. |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02978122&r=all |
| By: | Carbonero, Francesco; Ernst, Ekkehard; Weber, Enzo |
| Abstract: | The impact of robots on employment and trade is a highly discussed topic in the academic and public debates. Particularly, there are concerns that automation may threat jobs in emerging countries given the erosion of the labour cost advantage. We provide evidence on the effects of robots on worldwide employment, including emerging economies. To instrument the use of robots, we introduce an index of technical progress, defined as the ability of robots to carry out different tasks. Robots turn out to have a significantly negative impact on worldwide employment. While it is small in developed countries, for emerging economies it amounts to -11 per cent between 2005 and 2014. However, here, there appear positive spillovers especially from robotisation in manufacturing on employment outside manufacturing. Furthermore, we assess cross-country effects, finding that robots in developed countries decrease off-shoring just as employment in emerging economies. |
| Keywords: | robot,technology,employment,off-shoring,re-shoring |
| JEL: | J23 O33 F16 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224602&r=all |
| By: | Jung, Benjamin; Kohler, Wilhelm |
| Abstract: | We show that the combination of monopolistic competition and input-output linkages generate what we call an input distortion. The distortion arises because material input prices involve a markup over the social opportunity cost. This has so far escaped attention in the literature addressing efficiency of monopolistic competition equilibria. Using a stylized single sector model, we provide a full description of the social optimum for an economy featuring an input-output linkage in the presence of monopolistic competition. Using this as a benchmark, we describe the allocational inefficiency of a decentralized market equilibrium as well as first-best policies to achieve efficiency. In an integrated world equilibrium, a material input subsidy and an output subsidy turn out to be perfect substitutes. A wage tax is unable to serve in offsetting the input distortion. In a cooperative policy setting with two countries, an input subsidy is a second-best policy to address the input distortion. |
| Keywords: | input-output linkages,monopolistic competition,international trade,allocational inefficiency,optimal policy |
| JEL: | F12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224608&r=all |