Optimal Subsidization and Structural Change under Monopolistic Competition with Technical Progress a la Ethier

Ziesemer, Thomas (1990): Optimal Subsidization and Structural Change under Monopolistic Competition with Technical Progress a la Ethier.

Abstract

The North produces differentiated intermediate factors in monopolistically competitive firms.North and South produce consumption goods using the finite number of factors. The world optimum can be achieved through a combination of ad valorem and specific production subsidies, which converges to a simple rule of thumb for a large number of firms. A widening of markets leads to a larger number of firms, a higher ad valorem subsidy and a lower specific subsidy, and has no impact on the optimal size of firms.If population growth is higher in the South than in the North a higher share of intermediates will be exported to the South, production of consumption goods will grow faster in the South than in the North and employment in the North will shift to the intermediate sector. If the North pays the subsidies alone there will be a redistribution from North to South, which may make subsidies an issue of international negotiations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Growtk, structural change, technical change, optimal subsidies
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

References

Aghion, P. and P. Howitt (1989), A Model of Growth through creative destruction, MIT, mimeo, May.

Dixit, A. (1984), Growth and Terms of Trade under Imperfect Competition, in: H.Kierzkowski (ed.), Monopolistic Competition and International Trade, Oxford, Clarendon Press, 109 123.

Ethier, W. (1982), National and International Returns To Scale in the Modern Theory of International Trade, The American Economic Review, 72, 389 405.

Flam, H. and E. Helpman (1987), Industrial Policy under Monopolistic Competition, Journal of International Economics, 22, 79 102.

Grossman, G.M. and E. Helpman (1989a) Endogenous Product Cycles, NBER WP 2913.

Grossman, G.M. and E. Helpman (1989b) Growth and Welfare in a small open economy, Woodrow Wilson School Discussion Paper No. 145.

Grossman, G.M. and E. Helpman (1989c) Quality Ladders and Product Cycles, Wilson School Discussion Paper No. 152.

Grossman, G.M. and E. Helpman (1990), Comparative Advantage and Long Run Growth, The American Economic Review, vol. 80, 796 - 815.

Grossman, G.M. and E. Helpman (199b) Product Development and International Trade, Journal of Political Economy, voI. 97, forthcoming.

Helpman, E. and P.R. Krugman (1989), Trade Policy and Market Structure, MIT Press, Cambridge, Massachusetts.

Krueger, A.O. (1990), Government Failures in Development, Journal of Economic Perspectives, 4, 9-24.

Lucas, R. E. Jr., 1988, On the Mechanics of Economic Development, Journal of Monetary Economics, 22, July, 3 – 42.

Markusen, J.R. (1986), Explaining the Volume of Trade, American Economic Review, 76, 1002 1011.

Markusen, J.R. (1988), Production, Trade and Migration with Differentiated, Skilled Workers, Canadian Journal of Economics, XXI, 492 506.

Markusen, J.R. (1989), Trade in Producer Services and in other Specialized Intermediate Inputs, American Economic Review, 79, 85 95.

Neumann, M., 1989, Market Size, Monopoly Power and Innovations under Uncertainty, 295-306, in: D. B. Audretsch, L. Sleuwaegen and H. Yamawaki (eds.), The convergence of International and Domestics markets, North-Holland, Amsterdam.

Phelps, E. S., 1966, Models of Technical Progress and the Golden Rule of Research, Review of Economic Studies, vol. 33, 133-45.

Romer,P.M. (1987), Growth Based on Increasing Returns due to Specialization, The American Economic Review, 77, 56 62.

Romer, P. M., 1990, Endogenous Technological Change, Journal of Political Economy, vol. 98, forthcoming.

Shell, K., 1967, A Model of Inventive Activity and Capital Accumulation, in: Essays in the Theory of Optimal Growth, K. Shell, ed., Cambridge Mass.: MIT Press.

Uzawa, 1965, Optimum Technical Change in an Aggregative Model of Economic Growth, International Economic Review, vol. 6, January, 18-31.

Ziesemer, T., 1991, Human Capital, Market Structure and Taxation in a Growth Model with Endogenous Technical Progress, Journal of Macroeconomics, vol. 13, forthcoming.