MONOPOLISTIC COMPETITION WITH EFFICIENCY GAPS AND A HECKSCHER‐OHLIN TRADE PATTERN*

We develop a two‐factor, three‐sector model of international trade in which the monopolistically competitive firms are characterized by different fixed production costs. We show that, depending on the pattern of the international distribution of factor endowments, the trade pattern is determined not only by relative factor endowments as suggested by Heckscher and Ohlin, but also by absolute factor endowments via a mechanism of competitive selection in the monopolistically competitive sector.     

Trade flows in a spatial oligopoly: gravity fits well,but what does it explain?

Abstract .  Large distance and border effects on trade flows in some industries may result from the collusive division of geographic markets. In the Brazilian cement industry, traditional gravity equations fit the data well, yet limited regional flows are due to firms' strategic behaviour. Thanks to a unique institutional setting and an unusually rich data set, I directly control for trade costs, which – despite their importance – cannot account for the observed segmentation of local markets at current prices. The paper highlights how collusive behaviour can magnify the effects of distance, as firms use geography to coordinate on higher prices and less cross-hauling.     

POLITICAL ECONOMY OF STRATEGIC EXPORT POLICY IN A DIFFERENTIATED DUOPOLY*

This paper investigates the effect of a home firm's lobbying on a strategic export policy in a third market with a differentiated duopoly. We focus on its effect on domestic welfare under Bertrand and Cournot competition. Regardless of the mode of competition, the strategic export policy cannot improve domestic welfare in the presence of lobbying if the degree of product differentiation is high or the government is overly concerned with political contribution relative to domestic welfare. Moreover, for the same degree of product differentiation, the lobbying‐induced export policy is more likely to deteriorate domestic welfare relative to free trade under Cournot competition.     

STRATEGIC BUDGET CONSTRAINTS IN A UNIONIZED MIXED OLIGOPOLY

This paper considers the budget‐constraint problem where the government decides whether or not to impose a budget constraint on the public firm, assuming the public firm is less efficient than private firms. We find that imposing budget constraints on the public firm is the preferred choice because of the welfare‐improving effect. Our model suggests that the wage levels of the public firm can be lower or higher than those of private firms depending upon the degree of inefficiency. These results differ from Ishida and Matsushima's findings that in a unionized mixed duopoly, tight budget constraints can enhance social welfare when the public firm is as efficient as private firms.     

THE DECISION TO HIRE MANAGERS IN MIXED MARKETS UNDER BERTRAND COMPETITION*

This paper analyses the decisions of firms as to whether or not to hire managers when there is a public firm competing with a private firm in the product market. It is shown that under Bertrand competition with heterogeneous goods both firms hire managers. This is in contrast with the result obtained under Cournot competition, where only the private firm hires a manager. Moreover, welfare is lower if both firms hire managers than if neither firm does. In contrast, under Cournot competition welfare is greater if both firms hire managers.     

PRIZES VERSUS WAGES WITH ENVY AND PRIDE*

We show that if agents are risk‐neutral, prizes outperform wages if and only if there is sufficient pride and envy relative to the noisiness of performance. If agents are risk‐averse, prizes are a necessary supplement to wages (as bonuses).     

COMPETITION,REGULATION AND WELFARE IN THE PRESENCE OF NETWORK EXTERNALITIES*

In this paper we consider a simple model of an industry with network externalities, where a benefit to each consumer from network services depends on the size of the network. We first consider a single network and cover the cases with and without fixed cost of entry. We then turn to the two‐network industry, where the incumbent network and a new entrant network compete for the market and may differ both in their marginal costs and demand structures. In addition, we identify several situations where public policy may play a crucial role in sustaining socially advantageous network service provision.     

The convergence dynamics of a transition economy: The case of the Czech Republic

In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run path of a transition economy. The model's novel feature is the inclusion of quality investment in the standard framework of applied general equilibrium two-country models. This feature is necessary to explain the trend in the real exchange rate. We present an application to the Czech economy.     

TOURISM,DUTCH DISEASE AND WELFARE IN AN OPEN DYNAMIC ECONOMY*

This paper examines the effects of an expansion in tourism on capital accumulation, sectoral output and resident welfare in an open economy with an externality in the traded good sector. An expansion of tourism increases the relative price of the nontraded good, improves the tertiary terms of trade and hence yields a gain in revenue. However, this increase in the relative price of nontraded goods results in a lowering of the demand for capital used in the traded sector. The subsequent de‐industrialization in the traded good sector may lower resident welfare. This result is supported by numerical simulations.     

NESTING VERTICAL AND HORIZONTAL DIFFERENTIATION IN TWO‐SIDED MARKETS

We merge the two‐sided markets duopoly model of Armstrong (2006) with the nested vertical and horizontal differentiation model of Gabszewicz and Wauthy (2012), which consists of a linear city with different consumer densities on the left and on the right side of the city. In equilibrium, the high‐quality platform sells at a higher price and captures a greater market share than the low‐quality platform, despite the indifferent consumer being closer to the high‐quality platform. The difference between market shares is lower than socially optimal. A perturbation that introduces a negligible difference between the consumer density on the left and on the right side of the city may disrupt existence of equilibrium in the model of Armstrong (2006).     

Asymmetric Demand Information and Foreign Direct Investment*

We examine the FDI versus exports decision of firms competing in an oligopolistic (quantity‐setting) market under demand uncertainty and asymmetric information. Compared to a firm that chooses to export, a firm that chooses to set up a plant in the host market has superior information about local market demand. In addition to the well‐known tension between the fixed set‐up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if trade costs are zero. The analysis is robust to price competition and to the possibility that a foreign firm can engage in both FDI and exports.     

STRATEGIC EXPORT POLICY IN VERTICALLY RELATED MARKETS

This paper analyses how strategic export policies are affected by introducing an imperfectly competitive intermediate good into a Bertrand duopoly model with product differentiation, where a home and a foreign final‐good firm export to a third‐country market. It is shown that when the home and foreign markets for the intermediate good are segmented, the optimal export policy towards the final good is a tax. In contrast, under integrated markets, the optimal export intervention is a subsidy. Whether bilateral export intervention is welfare improving compared with free trade, depends on the degree of product differentiation between the home and foreign final goods.     

"PROTECTION AND REAL WAGES": THE HISTORY OF AN IDEA

Few economics articles have achieved the celebrity that still attaches to the paper, "Protection and Real Wages", by Wolfgang Stolper and Paul Samuelson in (1941). In this paper I discuss how the Stolper-Samuelson theorem has been re-interpreted over subsequent decades, and how attempts to generalize the theorem to higher dimensions have met with qualified results. The theorem leads to a simple proposition in political economy: in competitive models any productive factor can have its real return increased by a non-transparent policy whereby relative commodity prices are altered if there are enough commodities and joint production, is not too severe.     

TRADE IMPACTS ON SKILL ACQUISITION VIA VARIETY EXPANSION*

We show that trade enhances skill formation through gains from trade via variety expansion à la Krugman. Although workers are identical as unskilled labour, they differ in productivity as skilled labour. Workers become skilled by incurring training costs. By introducing these settings into a trade model with monopolistic competition, we show that, although trade makes all agents better off, its effect is stronger for skilled than unskilled workers, which stimulates skill acquisition. As a result of less productive workers becoming skilled, the wage dispersion among skilled workers increases.     

EXPORT SUBSIDIES VERSUS EXPORT QUOTAS WITH INCOMPLETELY INFORMED POLICY MAKERS*

This paper analyses export subsidies (price incentives) and export quotas (quantity controls) in the Brander‐Spencer (1985) model when policy makers have limited information on demand and cost structures. We examine necessary or sufficient information for policy makers to determine welfare‐enhancing policies. It is crucial that they know the elasticity value of the slope of the inverse demand curve and the market share. It is also shown that for policy makers, export quotas are superior to export subsidies under certain conditions.     

Exploring the effects of aggregation error in the estimation of consumer demand elasticities

Errors introduced by using aggregate data in estimating a consumer demand model have long been a concern. We study the effects of such errors on elasticity estimates derived from AIDS and QUAIDS models. Based on a survey of published articles, a generic parameterization of the income distribution, and the range of Gini coefficients reported for 28 OECD countries, we generate and analyze a large number of “observations” on the differences between elasticities calculated at the aggregate level and those calculated at the micro level. We suggest a procedure for evaluating the likely range of aggregation error when a model is estimated with aggregate data.     

The Dynamic Effects of the US Productivity Boom on Australia*

How has the USA's ‘new economy’ productivity boom affected Australia? We consider this question using a dynamic multisector growth model of the Australian and US economies. We find that productivity growth in the US durables sector generates small but important gains to Australia. We find that the transmission of growth is generated through increased export demand for agriculture. Consequently, the USA's productivity growth tends to favour Australia's traditional export sectors. Likewise, it increases the relative demand for less skilled labour in Australia and reduces the demand for more skilled labour and higher education.     

Increasing Returns,Financial Capital Mobility and Real Exchange Rate Dynamics*

The late 1990s saw a US IT investment boom, large capital flows into the USA and an appreciation of the US$. At the time, this appeared to be driven by expectations of continued IT‐related knowledge spillover externalities and associated productivity and profit growth. Using a two‐region dynamic general equilibrium model with externalities, we find a once‐off productivity shock leads to capital inflow and a real appreciation only in the short term. In the long term, capital flows stabilise and the real exchange rate depreciates. For a single shock to trigger long‐term growth in capital flows requires unrealistically large externalities.     

AN OLIGOPOLISTIC HECKSCHER–OHLIN MODEL OF FOREIGN DIRECT INVESTMENT*

We develop a 2 × 2 × 2 trade model in which one of the two sectors is perfectly competitive and the other is oligopolistic. The oligopoly sector consists of a given number of identical firms for each country, but they are free to locate in either country. The allocation of the firms between the two countries is endogenously determined, and changes in factor prices play a crucial role in establishing this equilibrium. Under this framework we examine the validity of factor price equalization, patterns of trade and gains from trade. Effects of technological progress and preference changes on firm locations are also analysed.     

Market Size and the Survival of Foreign‐owned Firms*

We develop a general equilibrium model with heterogeneous firms and foreign direct investment cost uncertainty and investigate the survival of foreign‐owned firms. The survival probabilities of foreign‐owned firms depend on firm‐level characteristics, such as productivity, and host country characteristics, such as market size. We show that a foreign‐owned firm will be less likely to be shut down when its parent firm's productivity is higher and its indigenous competitors are less productive. Although a larger market size will always reduce the survival probability of indigenous firms, it can lead to a higher survival probability for foreign‐owned firms if their parent firms are sufficiently productive.