Di Maio, Michele (2006): Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods.
Download (268kB) | Preview
This paper analyzes how increasing trade integration affects individual utility when the international specialization pattern is stochastic, i.e. when the number of varieties each country produces depends on the realization of a random variable. I employ a Ricardian continuum of goods model to show that in this case a trade off emerges. As in the standard model, higher trade integration reduces prices and increases expected real income. However, higher trade integration, reducing the number of active sectors in the economy, also increases the displacement cost the worker would suffer in a bad state (i.e. when the sector she is employed into has to close down because, ex-post, the foreign country’s competing sector results to be more efficient). The main result of the model is that there exists an optimal level of protection that it is higher the smaller the price reduction induced by trade integration and the more technologically similar are countries.
|Item Type:||MPRA Paper|
|Institution:||Università degli Studi di Macerata|
|Original Title:||Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods|
|Keywords:||Uncertainty; optimal protection; Ricardian model with a continuum of goods|
|Subjects:||F - International Economics > F1 - Trade > F19 - Other|
|Depositing User:||Michele Di Maio|
|Date Deposited:||31. Aug 2007|
|Last Modified:||30. Apr 2015 01:28|
 Bowles S., and Pagano U., (2006). Economic integration, cultural standardization and the politics of social insurance. in Bardhan P., Bowles S. and M. Wallerstein M, Globalization and Egalitarian Redistribution. Princeton University Press.  Brainard, W. C. and Cooper, R. N., (1968). Uncertainty and diversification in in- ternational trade. Studies in Agricultural Economics, Trade and Development, vol. 8  Brainard, S. L., (1991). Protecting the looser: optimal diversification, insurance and trade policy. NBER Working Paper, No. 3773  Dornbusch, R., Fischer, S. and Samuelson, P. A., (1977). Comparative advantage, trade, and payments in a Ricardian model with a continuum of goods. American Economic Review, vol. 67, 823 - 839  Eaton, J. and Grossman, G. M., (1985). Taris as insurance: optimal commercial policy when markets are incomplete. Canadian Journal of Economics, vol. 18 (2), 258 – 272  Eaton, J. and Kortum, S., (2002). Technology, geography, and trade. Econometrica, vol. 70 (5), 1741 – 1779  Fernandez, R., and Rodrik, D., (1991). Resistance to reform: status quo bias in the presence of individual-specific uncertainty. American Economic Review, vol. 81 (5), 1146 – 1155  Ho, C., (1994) A re-examination of the neoclassical trade model under uncertainty. Journal of International Economics, vol. 36, 1 – 27  Imbs, J. and Wacziarg, R., (2000). Stages of diversification. CEPR working paper No. 2642  Krebs, T, Krishna, P. and Maloney, W., (2005). Trade policy, income risk, and welfare. NBER working Paper No. 11255  Newbery, D.M. G. and Stiglitz, J., (1984). Pareto inferior trade. Review of Economic Studies, vol. 51, 1-12  Rodrik, D., (1997). Has Globalization Gone Too Far?, Institute for International Economics, Washington, DC.  Rodrik, D., (1998).Why do more open economies have bigger governments? Journal of Political Economy, 106(5)