Geography, competition and optimal multilateral trade policy

Nocco, Antonella, Ottaviano, Gianmarco I. P. and Salto, Matteo (2019) Geography, competition and optimal multilateral trade policy. CEP Discussion Papers (CEPDP1610). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use `disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2019 The Authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions
JEL classification:	D - Microeconomics > D4 - Market Structure and Pricing D - Microeconomics > D6 - Welfare Economics F - International Economics > F1 - Trade L - Industrial Organization > L0 - General L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance
Date Deposited:	27 Nov 2019 00:53
Last Modified:	22 Nov 2024 19:48
URI:	http://eprints.lse.ac.uk/id/eprint/102632

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