Trade Theorems Research Articles

Saving Household Production-Cum-Consumption Time: Implications for International Trade in Trash

This article revisits Kemp’s and Tran-Nam’s incorporation into trade theory the Gossenian theme that consumption takes time. We show how the substitutability between time-intensive household-produced consumption goods and time-saving commercially produced consumption goods (which save households’ consumption and production time) together with capital accumulation can lead to an increase in trash and international trade in trash. The applicability of the standard gains from trade theorems is shown to be compromised by the externalities associated with international trade in trash between North and South. Under some parameter values, South is better off under autarky than under free trade in trash and the gains from trade by North is not sufficient to compensate South’s loss from trade. JEL Codes: D13, F18, F13

Myerson-Satterthwaite Theorem and Asymmetric FPA Auctions

In this paper Myerson-Satterthwaite theorem with asymmetric First price auction (FPA) has been subject of investigation. Bilateral inefficiency trade theorem versus the efficiency of the FPA auctions in which there is supposedly no dominant strategy, where bids are private information, and are made simultaneously, where highest bid wins and winning bidder pays the winning bid. This type of auction may not be Pareto efficient (this condition requires that the item is allocated to the bidder with highest valuation). But in the sealed FPA auctions highest bidder does not know other bidders’ valuations and may lose to another bidder. In the auction setting we set reserve price that causes efficiency loss and decreases probability of trade. The results are ambiguous dependent on the type of the solution method used. Three methods of solution were used: Fixed point finite difference iterations, Backward shooting method, and Constrained strategic equilibrium (C.S.E). The reserve price set was 0.5 since θ_s∈(0,1)and θ_b∈(0,1), so the buyers’ value is likely to be [0.1,1] and the sellers’ value is likely to be [0,0.9],so in such case reserve price would eliminate low bidder types. The results are ambiguous in a sense that under Backward shooting method convergence is not true, so the Myerson-Satterthwaite theorem does hold which is not case under Fixed finite difference point iterations, and Constrained strategic equilibrium (C.S.E).Phenomenon known as winner’s curse occurs in a case of incomplete information.

No trade and yes trade theorems for heterogeneous priors

We show that contrary to currently widely-held misperceptions, the classical no trade theorem obtains even under heterogeneous priors. That is, when priors are not common, speculative trade is still impossible under common knowledge of rationality. However, trade becomes mutually acceptable if at least one party to the trade puts at least some slight probability on the other party being irrational. We also derive bounds on disagreements in the case of heterogeneous priors and common p-beliefs.

Is "no trade theorem" really a paradox: analysis based on decision theory

Is "no trade theorem" really a paradox: analysis based on decision theory

Asymmetric model of neoclassical trade and optimum tax-subsidy-tariff policy

This work constructs an asymmetric structure of neoclassical model of trade, and reexamines the theorems of trade, which were derived originally in 2 × 2 × 2 paradigm. Absence of non-traded sector, noted by Bhagwati, has been highlighted in a more serious fashion. Then optimum price distortions in the form of taxes, subsidies, and tariffs are introduced, and optimality of the price distortions is ascertained.

Foreign trade and grain prices in the Russian Empire. For or against the neoclassical theorems of trade?

This paper deals with the problem of the influence of grain export from the Russian Empire on the domestic price on bread. The counterfactual model of Russian grain market development is proposed, in case if grain export is ceased. The authors refer to a wider range of issues, including not only grain export of Russia in the beginning of the last century, but also to the neo-classical theories of foreign trade. The authors provide analyzes of export's effects on the balance of payments of the Russian Empire and investments structure and level. In this regard, it is proved that the growth of bread exports negatively affected investments in the manufacturing sector, and in another way in case of falling export of grain. The authors conclude that the export of labour-intensive goods from the country can provoke the outflow of capital in the country specializing in the production of capital-intensive goods, since the export of labour-intensive products reduces the demand for capital. The export of capital from the Russian Empire before the First World War was so significant that the government was forced to turn to foreign loans. In this regard, the authors have questioned that the positive balance of payments has always positive effect on the national economy. In Russia, grain export had negative consequences in the long term, slowing modernization, however making a positive trend for the country's agriculture, especially its Southwestern regions. However, the authors believe that increase in grain export had been predetermined by the nature of food consumption in the Russian Empire. In this context, the authors try to draw parallels with the modern situation in the Russian economy in the context of «resource curse».

Free Trade Agreements and Domestic Politics: The Case of the Trans‐Pacific Partnership Agreement

What is the role of domestic politics in facilitating or constraining a government's decision to participate in free trade agreements (FTAs)? This paper seeks to answer this question by focusing on the domestic politics in Japan over the Trans‐Pacific Partnership Agreement (TPP). In particular, we ask why the opposition to the TPP encompasses a much broader segment of society than is predicted by trade theorems. We show that a broader protectionist coalition can emerge through persuasion and policy campaigns by the elites, in particular, powerful protectionist interests expending resources to persuade the uncertain public.

Asymptotic Glosten--Milgrom Equilibrium

This paper studies the Glosten--Milgrom model whose risky asset value admits an arbitrary discrete distribution. In contrast to existing results on insider models, the insider's optimal strategy in this model, if it exists, is not of feedback type. Therefore, a weak formulation of equilibrium is proposed. In this weak formulation, the inconspicuous trade theorem still holds, but the optimality for the insider's strategy is not enforced. However, the insider can employ some feedback strategy whose associated expected profit is close to the optimal value, when the order size is small. Moreover, this discrepancy converges to zero when the order size diminishes. The existence of such a weak equilibrium is established, in which the insider's strategy converges to the Kyle optimal strategy when the order size goes to zero.

Asymptotic Glosten Milgrom Equilibrium

This paper studies the Glosten Milgrom model whose risky asset value admits an arbitrary discrete distribution. Contrast to existing results on insider's models, the insider's optimal strategy in this model, if exists, is not of feedback type. Therefore a weak formulation of equilibrium is proposed. In this weak formulation, the inconspicuous trade theorem still holds, but the optimality for the insider's strategy is not enforced. However, the insider can employ some feedback strategy whose associated expected profit is close to the optimal value, when the order size is small. Moreover this discrepancy converges to zero when the order size diminishes. The existence of such a weak equilibrium is established, in which the insider's strategy converges to the Kyle optimal strategy when the order size goes to zero.

A Model of Rational Speculative Trade

Due to the no trade theorems of Aumann (1976) and others, models of speculative trade have relied on the presence of irrational noise traders. We present a model in which trade occurs when all agents are fully rational speculators that share a common prior and trade a common value asset based only on private information. The motive that helps agents overcome adverse selection, and hence the no trade result, is experimentation. An agent that engages in trade receives a payoff but also learns about his type. If he learns he has a low skill the agent exits while if he learns he has a high skill he remains and continues to benefit from trade against future cohorts. Younger cohorts appear as noise traders in a single period snapshot since they enter unprofitable trades, thus the model provides a rational foundation for some perceived behavioral biases including overconfidence.

Trade theorems with search unemployment

Abstract We revisit the Heckscher‐Ohlin‐Samuelson model in the presence of labour market frictions à la Mortensen‐Pissarides. Relaxing the assumption of the one‐worker‐one‐firm matching rule, we show that the Stolper‐Samuelson theorem and the Rybczynski theorem may not hold in specific circumstances. We also demonstrate that the Factor Price Equalization theorem is valid only for capital and unemployed labour across countries, but not for employed labour. In equilibrium, trade patterns are determined by countries’ factor endowments and relative factor intensities in sectors (independent of factor intensities in production). Finally, our results suggest an additional explanation for the ‘missing trade’ phenomenon.

Distribution neutral abatement policy in a model of trade and environment

ABSTRACTThe Pollution Haven Hypothesis (PHH) states that with weak environmental policies a country can create comparative advantage in the polluting sector. This paper formulates a 3-good-3-factor model where the abatement input is a pure intermediate good. In our model, the PHH as well as the neoclassical trade theorems are valid only when environmental policies are distribution neutral. Inspired by the US Clean Air Act, we develop and estimate a dynamic panel model. We find that US environmental policies are consistent with distribution neutrality. Our results indicate that lowering abatement standards in all industries is the only way the US can become a pollution haven. In the context of our model, the PHH has damaging implications for the world environment.

Trade theorems in a model of vertical production chain

This paper investigates the Rybczynski theorem, the Stolper–Samuelson theorem, and the Heckscher–Ohlin theorem in a two-factor vertical production chain model of trade. For this purpose, capital is introduced into the model of Yano and Dei [Yano, M., & Dei, F. (2003). Trade, vertical production chain, and competition policy. Review of International Economics, 11(2), 237–252.]. A primary analytic device is the economy-wide production curve. This curve is derived under autarky and free trade, respectively.

Revisiting games of incomplete information with analogy-based expectations

This paper studies the effects of analogy-based expectations in static two-player games of incomplete information. Players are assumed to be boundedly rational in the way they forecast their opponent's state-contingent strategy: they bundle states into analogy classes and play best-responses to their opponent's average strategy in those analogy classes. We provide general properties of analogy-based expectation equilibria and apply the model to a variety of well known games. We characterize conditions on the analogy partitions for successful coordination in coordination games under incomplete information [Rubinstein, A., 1989. The electronic mail game: Strategic behavior under ‘almost common knowledge’. Amer. Econ. Rev. 79, 385–391], we show how analogy grouping of the receiver may facilitate information transmission in Crawford and Sobel's cheap talk games [Crawford, V.P., Sobel, J., 1982. Strategic information transmission. Econometrica 50, 1431–1451], and we show how analogy grouping may give rise to betting in zero-sum betting games such as those studied to illustrate the no trade theorem.

Can Stricter Environmental Regulations Increase Export of the Polluting Good?

Abstract According to the Pollution Haven Hypothesis (PHH), weak environmental policies improve a country's comparative advantage in the polluting sector, thus promoting its expansion. In this paper, we develop a neo-classical general equilibrium model with two goods and two factors and show that the relationship between environmental policies and comparative advantage can be ambiguous. We focus entirely on emission caps or command and control (CAC) programs of regulation and treat abatement as equivalent to a technological retardation. We show that when the technological retardation is Hick neutral, the PHH holds and the Heckscher Ohlin Samuelson (HOS) theorem determines trade patterns between a capital-abundant country and a labor-abundant country that follow different environmental policies. If pollution abatement is capital biased in the polluting sector, the standard trade theorems and the PHH may not hold. The paper derives a sufficient condition under which the PHH would hold. However, if this condition is violated, the PHH as well as the HOS theorem may not hold.

Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling

We study, in the framework of Back [Rev. Financial Stud. 5(3), 387–409 (1992)], an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm. The market consists of a risk-neutral informed agent, noise traders, and a market maker who sets the price using the total order. When the insider does not trade, the default time possesses a default intensity in the market’s view as in reduced-form credit risk models. However, we show that, in equilibrium, the modelling becomes structural in the sense that the default time becomes the first time that some continuous observation process falls below a certain barrier. Interestingly, the firm value is still not observable. We also establish the no expected trade theorem that the insider’s trades are inconspicuous.

Key international trade theorems and large shocks

Many of the key comparative statics theorems in the theory of international trade are stated and proven only for small changes. Large shocks to equilibrium may change a country's production pattern with trade, and such shocks are shown to provide a non-monotonic kind of response. Considered here are the effects of changes in relative commodity prices or of changes in technology on real wages, or on the location of internationally mobile capital. In addition, the effect of technological improvements abroad on a commodity produced at home may hurt real incomes at home, but perhaps not if the home country's production is completely wiped out by the foreign improvement.

Heterogenous Preferences and Equilibrium Trading Volume

The classic Lucas asset pricing model with complete markets stresses aggregate risk and, hence, fails to investigate the impact of agents heterogeneity on the dynamics of the equilibrium quantities and measures of trading volume. In this paper, we investigate under what conditions non-informational heterogeneity, i.e., differences in preferences and endowments, leads to non trivial trading volume in equilibrium. Our main result comes in form of a non-informational no trade theorem which provides necessary and sufficient conditions for zero trading volume in a dynamically efficient, continuous time Lucas market model with multiple goods and securities.

Agreeable bets with multiple priors

This paper considers a two-agent model of trade with multiple priors. Firstly, we characterize the existence of an agreeable bet on some event in terms of the set of priors. It is then shown that the existence of an agreeable bet on some event is a strictly stronger condition than the existence of an agreeable trade, whereas the two conditions are equivalent in the standard Bayesian framework. Secondly, we show that the two conditions are equivalent when the set of priors is the core of a convex capacity. These results are also related to the no trade theorems under asymmetric information.

Oligopsonistic Intermediate Input and Patterns of Trade*

We examine the validities of traditional trade theorems and patterns of trade for an economy with an oligopsonistic intermediate input. Specifically, the model consists of two final goods. one intermediate good, and two primary factors. One final good and the intermediate good are produced using primary factors, capital and labor. The second final good is produced using the intermediate good and labor. All markets operate under perfect competition except the intermediate good market, which is oligopsonistic. This model reflects the real world phenomena of oligopsony power excerted by some industries (e.g., the food processing industry) in the intermediate good purchases. Our analysis shows that some of the traditional trade theorems and H.O trade pattern may be overturned if the factor intensity of the competitive sector lies between those of oligopsony and intermediate good sectors. [F12]