Browsing by Subject "Monopolistic competition"

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Input-output linkages and monopolistic competition
input distortion and optimal policies
(2021) Kohler, Wilhelm; Jung, Benjamin
In this paper, we provide a detailed analysis of a mechanism that distorts production towards too much use of primary factors like labor and too little use of intermediate inputs. The distortion results from two ingredients that are cornerstones of modern quantitative trade theory: monopolistic competition and input-output linkages. The distortion as such is unrelated to trade, but has important consequences for trade policy, including a positive first-order welfare effect from an import subsidy. For a crystal-clear view on the distortion, we first look at it in a single-sector, closed economy where the monopolistic competition equilibrium would be efficient without the presence of input-output linkages. We compare the social-planner-solution with the decentralized market equilibrium, and we identify first-best policies to correct the distortion. To analyze the trade policy implications we then extend our analysis to a setting with trade between two symmetric countries. We identify first-best cooperative policies, featuring nondiscriminatory subsidies of intermediate input use, aswell as non-cooperative trade policies where countries use tariffs to weigh terms of trade effects against benefits from correcting the input distortion.
Die neue Außenhandelstheorie
das Melitz-Modell
(2009) Hofmann, Patricia
Standard international trade lectures normally comprises three central theories: the Ricardian Model, the Heckscher-Ohlin-Samuelson Modell and New Trade Theory a la Krugman 1979 and 1980. Nowadays this trilogy needs to be enhanced with the basic concepts of a new class of trade models: the New New Trade Theory which accounts for firm heterogeneity and market entry costs. The basic objective of this paper is to present the contribution of Marc J. Melitz in Econometrica 2003 which is central to this new class of trade theory. I show how it is embedded in antecedent theory and highlight the new insights for trade patterns stemming from it.
WTO membership and the extensive margin of world trade
new evidence
(2009) Felbermayr, Gabriel; Kohler, Wilhelm
Recent literature has argued that, contrary to the results of a seminal paper by Rose (2004), WTO membership does promote bilateral trade, at least for developed economies and if membership includes non-formal compliance. We review the literature in order to identify open issues. We then develop the simplest possible \corner-solutions" version of the gravity model which serves as a framework to readdress these issues. We focus on the extensive margin of trade that separates positive-trade from zero-trade country pairs. We argue that the model can be consistently estimated using Poisson pseudo-maximum-likelihood methods with exporter and importer fixed effects. We account for coding issues and the potential heterogeneity of the WTO membership which recent contributions have stressed. While we find that WTO membership increases the likelihood that a given country pair trades, we do not find that the extensive margin has a strong and systematic effect on the average trade-creating potential of the WTO.