Free Trade Agreement and Vertical Trade with a Manufacturing Base

We examine the effects of free trade agreement (FTA) on tariffs and welfare in a three‐country model with vertical trade, where an FTA is formed between a country exporting a final good whose production involves using an intermediate good, and a country exporting the intermediate good in exchange for the final good. We demonstrate that the FTA reduces its member country's external tariff, whereas it raises the non‐member country's tariff. The non‐member country unambiguously becomes better off. In contrast, the FTA may or may not make its member countries better off. This implies that the formation of an FTA may not always be Pareto‐improving.     

Market Size and Firm Location in a Service Industry

This paper investigates the welfare effects of firm location in a service industry. We consider the situation where firms determine their locations in either of two regions with a difference in market size. From the viewpoint of the consumers' welfare, there are too few firms in the large market and too many in the small market. However, from the viewpoint of the producers' and social welfare, the opposite is true. Further, an increase in the difference in market size is unambiguously unfavorable for the producers. On the other hand, such an increase is favorable for the consumers and the economy as a whole.     

A Continuous-Time Analysis of Optimal Restructuring of Contracts with Costly Information Disclosure

This paper studies the role of restructuring, as compared to the one of liquidation, in valuation of long-term debt contracts in a continuous-time model with costly information disclosure. In asset-pricing literature, Merton??s (J Finance 29:449?C470, 1974) contingent-claim models have been long used for valuation of corporate securities and loans. However, since they basically assume sufficiently complete security structures in markets, the literature is not necessarily suitable for examining costly-information problems. On the other hand, in corporate-finance literature, it has been well known that agency costs (i.e., conflicts of interest among agents) distort corporate capital structure under costly-information problems. However, the effect of the distortion on valuation of securities and loans has not been explicitly studied either in theory or in practice. This paper bridges such a gap between the two literatures. This paper shows that, under a costly-information problem, corporate leverage ratios are higher when restructuring is expected to be accepted in default than otherwise. The risk of a jump to liquidation increases the default probability in short term, and decreases the probability of restructuring over time.     

A Continuous-Time Optimal Insurance Design with Costly Monitoring

We provide a theoretical and numerical framework to study optimal insurance design under asymmetric information. We consider a continuous-time model where neither the efforts nor the outcome of an insured firm are observable to an insurer. The insured may then cause two interconnected information problems: moral hazard and fraudulent claims. We show that, when costly monitoring is available, an optimal insurance contract distinguishes the one problem from the other. Furthermore, if the insured’s downward-risk aversion is weak and if the participation constraint is not too tight, then a higher level of the monitoring technology can mitigate both problems.     

Trade Policies as Signals of Private Political Pressure

The situation of a home government facing political pressure from an exporting industry within its jurisdiction is considered. If a foreign government cannot directly observe such pressure, the home government has an incentive to understate it to induce foreign tariff reductions. In equilibrium, the home government will distort its first‐period trade policy in a direction that the industry does not prefer (i.e. raising the export tax or reducing the export subsidy) in order to reveal the true pressure, as compared with a policy selected under complete information.     

Term Structure of Interest Rates Under Recursive Preferences in Continuous Time

This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. In a representative-agent model with recursive utility and mean-reverting expectations on real output growth and inflation, this paper shows that, if (1) real short-term interest rates are high during economic booms and (2) the agent is comparatively risk-averse (less risk-averse) relative to time-separable utility, then a real yield curve slopes down (slopes up, respectively). Additionally, for the comparatively risk-averse agent, if (3) expected inflation is negatively correlated with the real output and its expected growth, then a nominal yield curve can slope up, regardless of the slope of the real yield curve.     

Vertical trade and free trade agreements

We investigate the effects of free trade agreements (FTAs) on tariffs and welfare in vertical trade. We consider a three-country model, where an FTA is formed between a country exporting a final good and a country exporting an intermediate good. The FTA unambiguously leads to a reduction in the member country’s tariff, but may cause the non-member country’s tariff level to increase. In the case, where FTA raises the non-member country’s tariff level, the FTA increases that country’s welfare. In contrast, the FTA may render its member countries better off. This result implies that the formation of an FTA may not always be Pareto-improving.     

Educating voters for protection

This paper analyzes an agricultural pressure group's publicity campaigns for protection of their industry. If the group knows the positive externalities of domestic production of their goods, they may educate voters on these before an election to induce a favored trade policy. Modeling this situation shows that the expenditure on such campaigns is an increasing convex function of the true externalities. It also shows that, when the farmer population is relatively large, a marginal decline in that population makes the per-capita campaign effort more intense; however, when the farmer population becomes small, a further decline makes the effort less intense.     

On estimation of almost ideal demand system using moving blocks bootstrap and pairs bootstrap methods

This paper applies a bootstrap method to the Almost Ideal Demand System (AIDS) proposed by Deaton and Muellbauer (Am Econ Rev 70:312–326, 1980), where the moving blocks bootstrap (MBB) and pairs bootstrap (PB) methods are adopted taking into account serially correlated error terms and limited dependent variables (note that the dependent variables in the AIDS model lie on the interval between zero and one). We aim to obtain the empirical distribution of the expenditure and price elasticities. Note that, the expenditure and price elasticities are obtained using the parameter estimates included in the AIDS model. In the past, a few studies report both the elasticity estimates and their standard errors obtained from the Delta method, but most of studies show only the elasticity estimates (i.e., statistical tests have not been done in most of the past studies). Applying MBB and PB methods to the AIDS model and using Japanese monthly household expenditure data from January, 1975 to December, 2012, we show in this paper that a few elasticities are statistically insignificant. We also compare the standard errors based on the bootstrap method with those based on the Delta method. We obtain the results that the differences between the Delta method and the bootstrap method are not negligible. In addition, the validity of the linear approximated AIDS (LA–AIDS) model which is commonly used in empirical studies is examined. In consequence, we find that the LA–AIDS model shows a poor performance, compared with the AIDS model, because the LA–AIDS model yields inconsistency on the elasticity estimates.     

Potential FDI causing large distortions in domestic production

When a foreign firm enters a domestic market, either via exports or through foreign direct investment (FDI), one factor determining the most favourable entrance mode is the profitability of the market, which may not be directly observed by the foreign firm. If the domestic trade protection policy is within a certain range that causes the foreign entrant's decision to swing between the two entry modes, the final choice will depend on the foreign firm's belief about the profitability. In such a situation, a domestic incumbent firm wishing to prevent FDI will heavily distort its production downward to convince the foreign competitor that the market is not profitable. When making trade policy, such strategic behaviour on the part of the domestic firm should be taken into account.