a Institute for Advanced Studies, Stumpergasse 56, A-1060, Vienna, Austria
b CEPR, 25-28 Old Burlington Street, London W1X 1LB, UK
c University of Linz, A-4040, Linz-Auhof, Austria
Abstract:
We explore liberalization of trade in differentiated commodities using a model featuring monopolistic competition and capital accumulation. We identify a mechanism of ‘cumulative causation’ in investment and an associated externality leading to under-accumulation. We provide long-run analytical results for a stylized core model and offer a quantitative treatment of transitional and sectoral issues using a disaggregate computational model. The aggregate welfare gains from unilateral liberalization are about three times larger than in the competitive case with constant returns, and they exhibit a characteristic pattern of generational incidence. Small export subsidies may be self-financing.