Autarkic Equilibrium Research Articles

Intra-Industry Trade, Involuntary Unemployment and Macroeconomic Stability

We study the impact of intra-industry trade and capital mobility on steady state welfare and on the stability properties of two countries with identical technologies and preferences. We consider a two-factor overlapping generations model, featuring one-sector of differentiated goods with taste for variety. There is imperfect competition in the output market and increasing returns to scale in production (fixed costs and externalities). In one country there is full employment and saddle path stability in autarky, whereas in the other there are efficiency wages, and the autarkic equilibrium may be locally indeterminate. After opening the borders, the rigid wage country may export indeterminacy to the full employment country, particularly if it is big enough. In contrast, when the full employment country is sufficiently big, local indeterminacy, and therefore expectations driven fluctuations may be eliminated in the world. In any case, stochastic and deterministic fluctuations (associated with local indeterminacy and bifurcations) are possible with smaller externalities, whatever the relative size of the two countries. Steady state welfare improves in the full employment country with free trade and capital mobility, while unemployment increases in the country with labor market rigidities, reducing welfare. We also find that taste for variety (and therefore intra-industry trade), reduces the likelihood of local indeterminacy, but leads to flip bifurcations under more plausible values of the model parameters.

Temporary Trade Shocks, Spatial Reallocation, and Persistence in Developing Countries: Evidence from a Natural Experiment in West Africa

In response to rising inequality following decades of trade liberalization, many countries are adopting trade restrictions. Can temporary trade restrictions have long-lasting effects on the spatial distribution of employment and resource allocation? To analyze this, this paper exploits the civil war in Cote d'Ivoire (2002-07), which disrupted access to the world market for two neighboring landlocked countries: Mali and Burkina Faso. The Ivorian war forced rerouting of trade from the Abidjan route to non-Abidjan routes. This paper builds a general equilibrium model where a subsistence-based autarkic hinterland coexists with an integrated segment, and there are two alternative routes to international markets. A trade shock to one route affects resource allocation in both routes by shifting the spatial margins of market integration and sectoral specialization. The effects are heterogeneous, depending on the pre-war market access of a location. The empirical analysis takes advantage of panel data and estimates the effects on structural change in employment on the non-Abidjan route using a triple difference design with location fixed effects. The areas that remain in autarkic equilibrium before and after the trade shock provide plausible estimates of the changes arising from long-term factors unrelated to the trade shock. The estimates show that the temporary trade shock created divergence between the Abidjan and non-Abidjan routes, with accelerated structural change in favor of manufacturing and services employment in the non-Abidjan route. This paper finds evidence of persistence in the effects through higher sunk investment in built-up density, agglomeration through concentration of skilled labor and greater public investment in complementary inputs such as electricity infrastructure (measured by nightlights density).

Renewable Resources, Pollution and Trade

AbstractDetrimental spillovers from industrial activity onto resource‐based productive sectors are very common, yet their effects remain understudied. While international trade often creates conditions for the over‐exploitation of open‐access renewable resources, it also provides opportunities for separating different productive sectors spatially. The existing literature suggests that a diversified exporter of the renewable resource good tends to lose from trade in both welfare and conservation terms as a result of over‐depletion, while the exporter of the non‐resource good gains. However, the resource stock externality of harvesting and the inter‐industry pollution externality often coexist in reality. In a small open economy framework, this paper shows that acknowledging their interaction changes the nature of the autarkic equilibrium and enriches the set of resource conservation and welfare outcomes from trade. Depending on the relative damage inflicted by the two industries on the environment, which in turn are functions of the pollution intensity and bioeconomic parameters, it is possible that the inter‐sectoral pollution externality persists and specialization in manufacturing is not optimal from a welfare perspective.

Dynamic income taxation without commitment: Comparing alternative tax systems

This paper addresses the question as to whether it is optimal to use separating or pooling nonlinear income taxation when the government cannot commit to its future tax policy. We also compare the levels of social welfare attainable under these tax systems versus that in the autarkic equilibrium. Both two-period and infinite-horizon settings are considered. Under empirically plausible parameter values, separating taxation is optimal in the two-period model, whereas autarky is optimal when the time horizon is infinite. The effects of varying the degree of wage inequality, the populations of low-skill and high-skill workers, and the discount rate are explored as well. For reasonable changes in these parameters, separating taxation remains optimal in the two-period model, while autarky remains optimal in the infinite-horizon model. Pooling is not optimal in either the two-period or infinite-horizon models for all parameter changes considered.

Financial liberalization and contagion with unobservable savings

How does the presence of decentralized market-based channels for borrowing and lending affect financial integration and financial contagion? To answer this question, I develop a two-country model of financial intermediation, where banks have access to country-specific investment technologies, and agents can borrow and lend in an international hidden market. In this environment, the possibility of hidden borrowing and lending has three main effects. First, it improves welfare with respect to the autarkic equilibrium, by allowing gains from “hidden” financial integration. Second, it halts the process of “official” financial integration. Third, it lowers the resilience of the economy to unexpected shocks to fundamentals.

Privatization and Strategic Mergers across Borders

AbstractWe present a theoretical model to capture the role of privatization in the incentives for and implications of cross‐border horizontal mergers. Absent any merger incentives in an autarkic equilibrium, we show that a decrease in the degree of privatization will lower the incentives for diversification of international production. The incentives for diversification for any given degree of privatization will fall when the private and public firms are allowed to move sequentially rather than simultaneously. The presence of the public firm also introduces a new source of asymmetry in the incentives for cross‐border mergers: a reduction in the degree of privatization at home will dampen the potential gains from a take‐over of a home firm by a foreign firm but magnify the potential gains from a take‐over of a foreign firm by a home firm.

Financial Liberalization and Contagion with Unobservable Savings

How does the presence of decentralized market-based liquidity channels affect financial liberalization and contagion? In order to answer this question, I extend the Diamond and Dybvig (1983) model of financial intermediation to a two-country environment, in which banks in each country enjoy a comparative advantage in one investment technology, and individuals can borrow and lend in an unobservable market. In this environment, I prove that the possibility of hidden savings has three main effects. First, it improves welfare with respect to the autarkic equilibrium by allowing gains from 'hidden' financial integration. Second, it halts the process of 'official' financial integration. Third, it lowers the resilience of the economy to unexpected liquidity shocks.

Cross-border mergers in vertically related industries

We construct a tractable model of an oligopolistic industry that allows us to capture the role of the vertical structure in the incentives for and implications of cross-border horizontal mergers. We show that vertical integration can increase the gains from cross-border mergers. We also demonstrate how market concentration interacts with costs in the decision of a relatively efficient foreign firm located in one country (source) to merge with a disintegrated or an integrated firm in another country (target) when the industry is vertically related. Absent any merger incentives in an autarkic equilibrium, we demonstrate that vertical integration can raise the incentives for diversification in production and add to the gains from cross-border horizontal mergers. Any additional gain from cross-border horizontal mergers, due to the existence of a vertically integrated production structure, is shown to be sensitive to the relative market concentration across countries. Cross-border mergers will be triggered by a relatively cost-efficient source taking over a disintegrated target when pre-merger competition among the disintegrated firms is relatively intense but, otherwise, the initial target will be a vertically integrated firm.

IMPOVERISHING TECHNICAL AND PREFERENTIAL IMPROVEMENTS

Abstract. Edgeworth showed that a free‐trading country might be impoverished by its own technical improvements if they are confined to the export industry and if no good is inferior in consumption. More recently it has been shown that improvements confined to the country's import competing industry can never be impoverishing if, in that country, no commodity is inferior in consumption. However, in all available proofs of these propositions, it has been assumed that for each country there exists an autarkic equilibrium. It will be shown that, without that assumption, the second proposition must be severely qualified.

The Torrens-Ricardo Principle of Comparative Advantage: an Extension*

The Torrens–Ricardo Principle of Comparative Advantage rests on the special assumptions that, both in autarky and under free trade, all countries can produce all commodities and that, in autarkic equilibrium, each country consumes all producible commodities, at least incipiently. We reformulate the Principle to accommodate alternative assumptions. In our reformulation the emphasis is on marginal rates of substitution, not on the traditional marginal rates of transformation in production. It is shown in effect that, in existing formulations, the supply side is assigned a role that it can rarely sustain.

Global Climate Change, Technology Transfer and Trade with Complete Specialization

The paper develops a model in which a country with better technology for abatement of Green House Gas (GHG) emission (the North) commits to an international protocol to keep the global GHG emission within a specified limit while it helps the mitigation effort in the other country (the South) with unconditional transfer of abatement technology. It finds out in the autarkic ('no trade') equilibrium the technology transfer offer from the North is always accepted by the South. The North may offer either a partial or a complete technology transfer. If partial technology transfer is offered it finds out the determinants of the extent of technology transfer. Then it compares the autarkic equilibrium with equilibrium where trade with complete specialization occurs and finds out that trade limits the scope of technology transfer as an instrument for mitigation of global GHG emission.

Intersectoral adjustment and unemployment in a two-country Ricardian model

SummaryIn a two-country Ricardian model, we study the dynamics of intersectoral reallocation of labour following upon a once and for all move to free trade. The job creation/destruction process in both sectors is slow and this results in unemployment during the transition toward the long run free trade equilibrium. We identify different free trade regimes depending on whether or not the world relative price is between the two autarkic prices. In some regimes, one of the two countries overshoots its autarkic equilibrium i.e. temporarily specializes according to its comparative disadvantage. In that case, welfare increases in both countries. In other regimes, the adjustment process is monotonic in both countries but welfare increases in only one country. When the two countries have “very” different rates of job creation/ destruction, the world price adjusts in such a way that the difference in adjustment speed between the two countries decreases.

International Trade Without Autarkic Equilibria

It is possible that wealthy trading countries nevertheless have no autarkic equilibria. However, if a country has no autarkic equilibrium, the offer curve of that country may consist of disjoint segments, which implies that a worldwide trading equilibrium does not always exist, that international exchanges do not always take place in equilibrium, and therefore that econometric estimates of the structure of open economies must be viewed with scepticism. In the present paper, I provide conditions that are necessary and sufficient for the existence of a worldwide free-trade equilibrium and for the existence of gains from free trade for individual countries.

Intertemporal Trade between Developed and Developing Nations: A Model of Host-Donor Tensions

Using a two-country overlapping generations model, we analyze some of the tensions between developed and developing nations regarding international capital movements. The nature of the model is such that optimizing agents in the South have a high rate of time preference. Otherwise, the North and the South are alike in all resepects. The differential rate of time preference means that the South is likely to have a relatively low capital/labor ratio, wage rate, and level of per capita income but a relatively high interest rate in autarkic equilibrium. The introduction of international capital flows (intertemporal trade) will be welfare reducing for the current generation in the South even though it may increase the next generation`s (and steady state) utility. We discuss the international conflicts which arise with international capital movements and the intergenerational conflicts which arise within each nation.

Multiple free trade equilibria in micro models of unemployment

Neoclassical theory suggests that trade patterns are linked to autarkic differences in relative opportunity costs. We demonstrate that when the Heckscher-Ohlin-Samuelson model is extended to allow for unemployment, there are forces present that create multiple free trade equilibria, even when both countries are identical and autarkic equilibrium is unique. There is no necessary link between relative opportunity costs and trade patterns. While our primary focus is on search-generated unemployment, we argue that the analysis also applies to situations where unemployment is generated by minimum wages, efficiency wages, or implicit contracts.

The impact of differences in the levels of technology on international labor migration

In this paper we analyze the patterns of international labor migration in a two-country world where one country's production technology is superior to that of the other country. We exploit an overlapping-generations model which enables us to trace the relevant dynamic considerations. We find that in the absence of international capital movements labor will migrate from the technologically-inferior to the technologically-superior country unless the stationary autarkic equilibrium is characterized by over-investment relative to the Golden Rule and the long-run elasticity of the interest rate with respect to the technological level is sufficiently large, in which case migration will be from the technologically-superior country.

Is International Trade Profitable to Oligopolistic Industries?

The authors examine whether oligopolistic autarkic industries operating in two different countries would gain from the opening of trade. They analyze a wide range of behavioral assumptions (as parameterized by conjectural variations) and a homogeneous products oligopoly for a large class of demand functions. Their findings can be summarized as follows: (1) for any given number of firms in each country's industry, there is always at least one of the two countries where firms make higher profits under autarky than under free trade; and (2) when there are fixed costs and the industry in each country is at its long-run (zero profit) autarkic equilibrium, then all firms in both countries lose from trade. Additional results are derived for the case when the demand sizes of countries can be parameterized in a meaningful way. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

THE OPEN‐ECONOMY PHILLIPS CURVES AND THE WELFARE GAINS FROM TRADE*

ABSTRACTBy postulating convex‐to‐origin Phillips curves and a concave‐to‐origin indifference map in the unemployment‐inflation space, we find that, the pure gains from trade aside, the post‐trade equilibrium under flexible exchange rates cannot be superior to that under autarky because a variable exchange rate generates no countercyclical forces. Under a fixed exchange rate regime, a country can be better off (worse off) after trade than before trade if the foreign rate of inflation is lower (higher) than that prevailing in autarkic equilibrium. If countries co‐operate and jointly reduce their rates of inflation, they can improve their welfare and yet maintain balance of payments equilibrium. If the rate of profit is a variable determining the position of the Phillips relationship, international trade improves the welfare of the labour‐abundant and worsens that of the capital‐abundant country.