ECON 301: Intermediate Microeconomics (UG)
ECON 322: Undergraduate Seminar (UG)
INTB 334: International Trade (UG)
ECON 498: Topics in Trade/Industrial Policy (UG)
ECON 960: International Trade (G)
ECON 969: International Trade Seminar (G)
Trade Agreements, Political Economy, Conflict and Appropriation, International Cartels, Economic Growth
- "Understanding Economic Sanctions: Interdisciplinary Perspectives on Theory and Evidence" (with Gabriel Felbermayr, T. Clifton Morgan and Yoto V. Yotov), European Economic Review, (forthcoming).
We review a number of developments and trends in the literature on economic sanctions. We discuss salient contributions to the theoretical literature, data collection, and empirical work on the impact, effectiveness and success of sanctions in Economics and Political Science. Our interdisciplinary perspective highlights the existence of a stark contrast in the ways the two disciplines view and analyze sanctions. Taking advantage of this perspective, we identify potential directions for future work. Most importantly, we argue that moving toward a better understanding of the causes and consequences of economic sanctions requires a much tighter integration of concepts from Political Science and Economics and a more extensive interdisciplinary collaboration.
- "Timing the Impact of Sanctions on Trade" (with Mian Dai, Gabriel Felbermayr, Aleksandra Kirilakha, Erdal Yalcin and Yoto V. Yotov), in Research Handbook on Economic Sanctions, edited by Peter A.G. van Bergeijk, (forthcoming).
We capitalize on the latest estimation methods in the empirical gravity literature and the development of a new dataset (the Global Sanctions Data Base, GSDB) to study the evolution, over time, of the effects of sanctions on international trade. Our analysis reveals that the contemporaneous effects of sanctions on trade are large, negative and statistically significant. Additionally, we obtain negative and significant anticipatory effects prior to the official imposition of sanctions, as well as negative and significant post-sanction effects, which disappear gradually approximately eight years after the lifting of sanctions. Our work generates several insights related to the estimation of the impact of sanctions on trade and unveils new avenues for future work. For example, we find the strength of the negative impact of sanctions to rise with the duration of the time that sanctions are in force. Moreover, our analysis of unilateral vs. multilateral and US vs. UN vs. EU sanctions suggests that unilateral sanctions and sanctions imposed by the US stand out as being most effective. A battery of sensitivity experiments confirms the robustness of our main findings and conclusions.
- "The Global Sanctions Data Base: An Update that Includes the Years of the Trump Presidency" (with Gabriel Felbermayr, Aleksandra Kirilakha, Erdal Yalcin and Yoto V. Yotov), in Research Handbook on Economic Sanctions, edited by Peter A.G. van Bergeijk, (forthcoming).
We introduce and discuss 381 previously unrecorded sanction cases among which 75 emerged during 2016-2019, a period that coincides with the Trump presidency. These newly considered cases are included in the updated Global Sanctions Data Base (GSDB) of Felbermayr et al. (2020), thus raising the total of sanction cases recorded there to 1101. Our descriptive analysis reveals that a number of sanctions were lifted in 2016. However, in 2017 we witnessed a substantial increase in the deployment of new – primarily 'smart' (i.e., financial and travel) – sanctions of which more than half were imposed by the United States. Moreover, we observed a significant rise in the number of sanctions aiming to 'change' the policies of sanctioned states and to fight 'terrorism'. Almost all sanctions initiated by the Trump administration are still in place, so assessment of their success remains open.
- "The Global Sanctions Data Base" (with Gabriel Felbermayr, Aleksandra Kirilakha, Erdal Yalcin and Yoto V. Yotov), European Economic Review, (forthcoming).
This article introduces the Global Sanctions Data Base (GSDB), a new dataset of economic sanctions that covers all bilateral, multilateral, and plurilateral sanctions in the world during the 1950-2016 period across three dimensions: type, political objective, and extent of success. The GSDB features by far the most cases amongst data bases that focus on effective sanctions (i.e., excluding threats) and is particularly useful for analysis of bilateral international transactional data (such as trade flows). We highlight five important stylized facts: (i) sanctions are increasingly used over time; (ii) European countries are the most frequent users and African countries the most frequent targets; (iii) sanctions are becoming more diverse, with the share of trade sanctions falling and that of financial or travel sanctions rising; (iv) the main objectives of sanctions are increasingly related to democracy or human rights; (v) the success rate of sanctions has gone up until 1995 and fallen since then. Using state-of-the-art gravity modeling, we highlight the usefulness of the GDSB in the realm of international trade. Trade sanctions have a negative but heterogeneous effect on trade, which is most pronounced for complete bilateral sanctions, followed by complete export sanctions.
- "Inequality and Conflict: Burning Resources to Support Peace" (with Michelle R. Garfinkel), Economics Letters, Vol. 197, (December 2020).
We consider a simple, guns-versus-butter model in which agents choose between "war" and "peace" to study the implications of inequality in resource ownership for equilibrium outcomes. Provided war is destructive, peace can emerge as the stable equilibrium, but only if the distribution of resource ownership is sufficiently even. We establish that, when this condition fails, the richer agent can destroy a portion of its resource endowment to even out the ex post distribution and thereby support peace. We also examine the importance of ex ante resource transfers and show that they are Pareto superior to burning resources.
- "Arming in the Global Economy: The Importance of Trade with Enemies and Friends" (with Michelle R. Garfinkel and Yoto V. Yotov), Journal of International Economics, Vol. 123, (March 2020).
We analyze how trade openness matters for interstate conflict over productive resources. Our analysis features a terms-of-trade channel that makes security policies trade-regime dependent. Specifically, trade between two adversaries reduces each one's incentive to arm given the opponent's arming. If these countries have a sufficiently similar mix of initial resource endowments, greater trade openness brings with it a reduction in resources diverted to conflict and thus wasted, as well as the familiar gains from trade. Although a move to trade can otherwise induce greater arming by one country and thus need not bewelfare improving for both, aggregate arming falls. By contrast, when the two adversaries do not trade with each other but instead trade with a third (friendly) country, amove from autarky to trade intensifies conflict between the two adversaries, inducing greater arming. With data from the years surrounding the end of the Cold War, we exploit the contrasting implications of trade costs between enemies versus trade costs between friends to provide some suggestive evidence in support of the theory.
- "Problems of Commitment in Arming and War: How Insecurity and Destruction Matter" (with Michelle R. Garfinkel), Public Choice, 178(3-4), (March 2019), pp. 349-369. (Online Appendix).
This paper analyzes a guns-versus-butter model in which two agents compete for control over an insecure portion of their combined output. They can resolve this dispute either peacefully through settlement or by military force through open conflict (war). Both types of conflict resolution depend on the agents' arming choices, but only war is destructive. We find that, insofar as entering into binding contracts on arms is not possible and agents must arm even under settlement to secure a bigger share of the contested output, the absence of long-term commitments need not be essential in understanding the outbreak of destructive war. Instead, the ability to make short-term commitments could induce war. More generally, our analysis highlights how the pattern of war's destructive eects, the degree of output insecurity and the initial distribution of resources matter for arming decisions and the choice between peace and war. We also explore the implications of transfers for peace.
- "Rules for Dividing a Disputed Resource in the Context of the Classical Liberal Argument for Peace" (with Michelle R. Garfinkel), Peace Economics, Peace Science and Public Policy, 24(1), (February 2018), pp. 1-16. (Lead Article).
In this paper, we study alternative forms of conflict resolution, both peaceful and non-peaceful, between two countries that compete for claims to a resource used to produce potentially traded goods. Consistent with the classical liberal argument, peace supports mutually beneficial trade, whereas war preempts it. War always induces countries to allocate resources into non-contractible arming (“guns”) for superiority in conflict. Under peaceful settlement, countries might choose to arm as well for gaining leverage in negotiations, but arming is typically less than what it is under war. Building on the observation that arming itself affects the countries’ bargaining sets, we compare the efficiency properties of division rules generated by three prominent bargaining solutions – namely, splitting the surplus, equal sacrifice, and Nash bargaining – and show how they depend on the gains from trade.
- "Trade Openness and the Settlement of Domestic Disputes in the Shadow of the Future" (with Michelle R. Garfinkel), Research in Economics, 69, (June 2015), pp. 191-213.
We explore the severity of an ongoing dispute over a productive resource within a country that participates in world trade. In addition to arming, the contending groups in our setting choose either to engage in destructive conflict or to settle their dispute peacefully. Our central objective is to characterize the conditions under which the dispute might be resolved peacefully instead of violently. The analysis underscores the intuitive roles played by the destructiveness of open conflict and the salience of the future that have been identified in the previous literature, but it also provides some novel insights into how world prices and trade openness matter. Among other things, we find that, given conflict's destructive effects and time preferences, settlement is most likely to be supported as a stable equilibrium when the "traditional" gains from trade are largest. However, there also exist circumstances under which increased trade openness can induce destructive conflict.
- "Trade and Insecure Resources" (with Michelle R. Garfinkel and Stergios Skaperdas), Journal of International Economics, 95:1, (January 2015), pp. 98-114. (Supplementary Appendix).
We construct a model of conflict and trade to study the consequences of interstate disputes over contested resources (land, oil, water or other resources) for arming, welfare and trade flows. Different trade regimes imply different costs of such disputes in terms of arming. Depending on world prices, free trade can intensify arming to such an extent that the additional security costs it brings swamp the traditional gains from trade and thus render autarky more desirable for one or all rival states. Free trade, though, is always an equilibrium, and sometimes is a dominant one with features of a prisoner's dilemma outcome. Furthermore, contestation of resources can reverse a country's apparent comparative advantage relative to its comparative advantage in the absence of conflict. And, where such conflict is present, comparisons of autarkic prices to world prices could be inaccurate predictors of trade patterns.
- "Economic Integration and the Sustainability of Multimarket Collusion" (with Eric W. Bond), Economics Letters, 117:1, (October 2012), pp. 42-44.
We examine the impact of (and links between) two types of economic integration on the stability of multimarket collusion when firms interact in quantities in segmented markets: (1) multilateral trade liberalization, captured by a reduction of trade costs across all markets; and (2) preferential trade liberalization, captured by an expansion in the size of individual markets while holding the level of external trade costs (tariffs) constant. In general, collusive stability is non-monotonically related to economic integration. In the case of multilateral liberalization, the effect depends on the initial level of trade costs and the extent of liberalization. However, on the average, the complete elimination of trade costs is pro-competitive when these costs are sufficiently high initially. In the case of regional integration, the effect of liberalization is pro-competitive when external trade barriers are sufficiently high, but anti-competitive when these barriers are sufficiently low.
- "Trade in the Shadow of Power" (with Michelle R. Garfinkel and Stergios Skaperdas) in M.R. Garfinkel and S. Skaperdas (eds.), The Oxford Handbook of the Economics of Peace and Conflict, New York, NY: Oxford University Press, 2012.
In this chapter, we examine how some of the main results in international trade theory fare when we abandon the traditional assumption of third-party enforcement of property rights. Without such enforcement, countries arm and exercise power to secure resources used in production or to secure the output from that production. Because arming is endogenous and takes scarce resources to produce, the production of final goods is also endogenous. Consequently, prices in either domestic or international markets reflect not only preferences, endowments or technologies of production as predicted by traditional models, but also arming and the power that comes from that. As we show in the context of a Ricardian model, those countries that produce the most socially valued goods tend to arm less, giving them a "comparative disadvantage" in power. Accordingly, the level of welfare obtained by these countries could be lower than that obtained in a competitive economy with perfect security. In the context of a Heckscher-Ohlin model, we find that free trade need not be preferred to autarky, as the costs of conflict or self-enforcement swamp the familiar gains from trade for a certain range of world prices. Finally, trade in the shadow of power can distort comparative advantage.
- "On the Stability of Multimarket Collusion in Price-Setting Supergames" (with Osayi Akinbosoye and Eric W. Bond), International Journal of Industrial Organization, 30:2, (March 2012), pp. 253-264.
In this paper we examine how trade liberalization affects collusive stability in the context of multimarket interactions. The model we consider is a segmented-markets duopoly with differentiated goods in which price-setting firms pool their incentive constraints across markets to sustain their most collusive outcome. We find that, when goods are very close substitutes and trade costs are sufficiently high, a marginal reduction in trade costs facilitates collusion. Exactly the opposite is true if, for any given degree of product substitutability, trade costs are sufficiently low. We also study the dependence of multimarket collusion on product differentiation.
- "Intra-Industry Trade and the Skill Premium: Theory and Evidence" (with Elias Dinopoulos, Bin Xu and Yoto Yotov), Journal of International Economics, 84:1, (May 2011), pp. 15-25. (Unpublished Supplementary Appendix).
We explore theoretically and empirically the relationship between intraindustry trade and the skill premium. Our model features a Chamberlinian-type mechanism of income distribution based on quasi-homothetic consumer preferences, non-homothetic production, and factor-biased scale economies at the firm level. The analysis focuses on a two-country, one-sector model of intraindustry trade with two factor inputs consisting of high-skilled and low-skilled labor. We find that a move from autarky to free trade (a) raises the output of the representative firm and its level of total factor productivity, and (b) reduces (raises) the relative wage of high-skilled workers under the hypothesis of output-skill substitutability (output-skill complementarity). Plant-level evidence from Mexico supports the empirical relevance of the proposed income-distribution mechanism.
- "Globalization and Insecurity: Reviewing Some Basic Issues" (with Michelle R. Garfinkel and Stergios Skaperdas) in G.D. Hess (ed.), Guns and Butter: The Economic Causes and Consequences of Conflict, Cambridge, MA: MIT Press, June 2009.
We argue that the costs of domestic and transnational insecurity are large and economically significant and that they may vary with the trade regime of a country. Then, in evaluating trade regimes, the gains from trade need to be weighed against the change in the security costs they induce. Within a simple model of trade, small countries that import a contested resource unambiguously gain from free trade. However, exporters of a contested resource incur additional security costs that are higher than the gains from trade compared to autarky, as long as the international price of the contested resource is not too high. We conclude with a discussion of how domestic and transnational governance could reduce insecurity.
- "Globalization and Domestic Conflict" (with Michelle R. Garfinkel and Stergios Skaperdas), Journal of International Economics, 76:2, (December 2008), pp. 296-308. (Unpublished Supplementary Appendix).
We examine how globalization affects trade patterns and welfare when conflict prevails domestically. We do so in a simple model of trade, in which a natural resource like oil is contested by competing groups using real resources ("guns"). Thus, conflict is viewed as ultimately stemming from imperfect property-rights enforcement. When comparing autarky with free trade in such a setting, the gains from trade have to be weighed against the possibly higher resource costs of conflict. We find that importers of the contested resource gain unambiguously. By contrast, exporters of the contested resource lose under free trade, unless the world price of the resource is sufficiently high. Regardless of what price obtains in the world market, countries tend to over-export the contested resource relative to what we would observe if there were no conflict; for some range of prices, the presence of conflict even reverses the country's comparative advantage. For an even wider range of prices, an increase in the international price of the contested resource reduces welfare, an instance of the "natural resource curse."
- "Trade Costs and Multimarket Collusion" (with Eric W. Bond), Rand Journal of Economics, 39(4), (Winter 2008), pp. 1080-1104.
Contrary to conventional wisdom, this article argues that trade liberalization may facilitate collusion and reduce welfare. With the help of a duopoly model in which firms interact repeatedly in multiple markets, we first show that, if trade costs (i.e., tariffs/transport costs) and discount factors are not too high, efficient cartel agreements necessitate the cross-hauling of goods, as that entails lower deviation incentives. In this setting, we then demonstrate that reciprocal trade liberalization always raises total output when trade costs are within a range whose lower bound exceeds a threshold level, but may reduce total output (and thus be pro-collusive) when trade costs are below that threshold level.
Reprinted in: Eric W. Bond, (ed.) Trade Policy, Trade Agreements, and Economic Growth: Essays in International Trade Theory, World Scientific Studies in International Economics, 2017.
- "Tariff Adjustments in Preferential Trade Agreements" (with Eric W. Bond) in H. Beladi, K. Choi, N.V. Long, M. Tawada, and B. Tran-Nam Atax (eds.), Globalization and Emerging Issues in Trade Theory and Policy, Emerald Group Publishing Limited, October 2008.
In this paper we examine how preferential trade liberalization affects the terms of trade, external tariffs and welfare of the integrating countries and the rest of the world. Our analysis is based on a three-country, three-good, general equilibrium model with symmetric customs union (CU) members. The model generalizes previous work by considering more general consumer preferences and production, which allows for the possibility that exports of CU members are complements for exports of the rest of the world. We find that Kemp-Wan tariff adjustments require a decrease (increase) in the external tariff of signatories to a preferential trade agreement to accompany internal liberalization in the neighborhood of internal free trade when member goods are substitutes (complements) for those of non-members. In contrast to the analysis based on special case of CES consumer preferences, the adjustment path of the external tariff to reductions in the internal tariff could be non-monotonic when preferences are general. Our results are of interest for the design of rules for multilateral trade agreements with respect to preferential liberalization, since they indicate how tariffs must be adjusted to eliminate negative impacts on non-member countries.
- "Patent Protection and Global Schumpeterian Growth" (with Elias Dinopoulos and Ali Gungoraydinoglu) in E. Dinopoulos, P. Krishna, A. Panagariya and K. Wong (eds.), Trade, Globalization and Poverty, Routledge, Taylor and Francis Ltd, January 2008.
The paper develops a dynamic model of scale-invariant global Schumpeterian (R&Dbased) growth, North-South trade, and international patent protection. Intellectual property protection takes the form of finite-length and perfectly enforceable global patents awarded to Northern firms that discover new higher-quality products. The model generates product-cycle trade, endogenous longrun Schumpeterian growth, and an endogenous wage gap between Northern and Southern workers. An increase in the global patent length worsens the wage-income inequality between North and South, increases the rate of product imitation and has an ambiguous effect on long-run Schumpeterian growth. If the initial measure of industries protected by patents is sufficiently high, then a rise in the global patent length reduces the long-run rate of global innovation and growth. Globalization that takes the form of an expansion in the size of the South increases the rate of imitation, does not affect the long-run rate of innovation and growth, and worsens the wage-income distribution between Northern and Southern workers.
- "Rent Protection as a Barrier to Innovation and Growth" (with Elias Dinopoulos), Economic Theory, 32(2), (August 2007), pp. 309-332.
We build a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests. We term the costly attempts of incumbent firms to safeguard the monopoly rents from their past innovations rent-protecting activities. Our analysis (1) offers a novel explanation of the observation that the difficulty of conducting R&D has been increasing over time, (2) establishes the emergence of endogenous scale-invariant long-run innovation and growth, and (3) identifies a new structural barrier to innovation and growth. We also show that long-run growth depends positively on proportional R&D subsidies, the population growth rate, and the size of innovations, but negatively on the market interest rate and the effectiveness of rent-protecting activities.
- "A Strategic and Welfare Theoretic Analysis of Free Trade Areas" (with Eric W. Bond and Raymond G. Riezman), Journal of International Economics, 64:1, (October 2004), pp. 1-27. (Lead Article).
We construct a three-country model to determine how the formation of free trade areas (FTAs) affects optimal tariffs and welfare. We find that, at constant rest of the world (ROW) tariffs, the adoption of internal free trade induces union members to reduce their external tariffs below the Kemp–Wan [J. Int. Econom. 6 (1976) 95–97] level, and causes ROW's terms of trade to improve and its welfare to rise. When ROW also behaves optimally, its policy response to the formation of the FTA is to raise tariffs. Generally, FTA members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large. We also demonstrate how FTAs may undermine the attainment of global free trade.
Reprinted in: Eric W. Bond, (ed.) Trade Policy, Trade Agreements, and Economic Growth: Essays in International Trade Theory, World Scientific Studies in International Economics, 2017.
Reprinted in: Raymond Riezman, (ed.) International Trade Agreements and Political Economy, World Scientific Studies in International Economics, 2013.
- "Rules for the Disposition of Tariff Revenues and the Determination of Common External Tariffs in Customs Unions," Journal of International Economics, 60:2, (August 2003), pp. 387-416.
This paper is about the determination of common external tariffs (CETs) in customs unions (CUs). We first examine how the relationship between preferences over CET levels, technology and the distribution of factor ownership in a CU is conditioned by the rule that determines the disposition of tariff revenues. We then explore how majority voting at the country level translates these preferences into an equilibrium CET. Among other things, we find that, when revenues are partitioned in proportion to members’ imports, tariff preferences may be polarized, the trade patterns of some CU members may be endogenous, and, as a result, their payoff functions may not be single-peaked. This leads to voting outcomes that dramatically differ from those arising under other sharing rules (e.g., the ‘population’ and ‘consumption’ rules) and raises the possibility of a Condorcet paradox.
- "Comparing Bargaining Solutions in the Shadow of Conflict: How Norms against Threats Can Have Real Effects" (with Nejat Anbarci and Stergios Skaperdas), Journal of Economic Theory, Vol. 106, No. 1, (September 2002), pp. 1-16. (Lead Article).
In many economic environments agents make costly and irreversible investments (in “guns”) that may enhance their respective threat payoffs but also shrink the utility possibilities set. In such settings, with variable threats and a variable utility possibilities set, it becomes possible to rank different bargaining solutions in terms of efficiency. We compare bargaining solutions within a class in which the influence of the threat point on the bargaining outcome varies across solutions. Under symmetry, we find that the solution in which the threat point is least influential—the equal sacrifice solution—Pareto-dominates the other solutions. Since the equal sacrifice solution puts the least weight on the threat point, norms against threats (that can be seen in many seemingly rhetorical pronouncements in adversarial relations) can mitigate some of the costs of conflict and therefore have efficiency-enhancing effects.
- "Optimum Tariffs and Retaliation Revisited: How Country Size Matters," Review of Economic Studies, 69:3, (July 2002), pp.707-727.
In his seminal work on tariff retaliation, Johnson (Review of Economic Studies,21, 1953–1954) showed that a country will “win” a bilateral “tariff war” if its relative monopoly/monopsony power in world trade is sufficiently large. However, it is unclear from Johnson's analysis and from subsequent research on the subject how this power is determined in general economic environments. An important goal of this paper is to address this issue. With the help of a neoclassical trade model in which country size is at centre stage, it is shown that a sufficient condition for a country to prefer a non-cooperative Nash tariff equilibrium (retaliation) over free trade is that its relative size be sufficiently large. The paper also refines the structure of the general trade model and generates additional characterization results on the importance of country size for best-response tariff functions, retaliatory tariffs, and welfare.
- "On Tariff Preferences and Delegation Decisions in Customs Unions: A Heckscher-Ohlin Approach," Economic Journal, 112:481, (July 2002), pp. 625-648.
This paper studies preferences of customs union (CU) members over common external tariff (CET) levels and extends the literature on delegation decisions over trade policy in models with production. In a model with similar CU members, we prove that most‐preferred CETs can be ranked with the help of compensated price elasticities of import demand functions. In the Heckscher-Ohlin trade model, we show these elasticities depend on inter-country differences in relative factor endowments and inter-sectoral differences in technology. This helps identify the optimal policy maker in a CU and demonstrates delegation decisions over trade policy can be integrated into mainstream trade theory.
- "Insecure Property and the Efficiency of Exchange" (with Stergios Skaperdas), Economic Journal, 112:476, (January 2002), pp. 133-146.
We examine the effect of insecure property and its accompanying enforcement costs on the efficiency of exchange. Because of the large enforcement costs that may be induced by the expectation of exchange, limited settlement without exchange may be ex ante superior for an adversary or even Pareto dominant. We therefore show how the removal of restrictions on exchange and the development of secure property are related.
- "Guns, Butter and Openness: On the Relationship between Security and Trade" (with Stergios Skaperdas), American Economic Review: Papers and Proceedings, 91(2), (May 2001), pp. 353-357.
- "Deepening of Regional Integration and Multilateral Trade Agreements" (with Eric W. Bond and L. Alan Winters), Journal of International Economics, 53:2, (April 2001), pp. 335-361. (Unpublished Supplementary Appendix).
We construct a three-country, two-bloc, multi-product trade model in which tariff agreements between customs union members are binding whereas inter-bloc tariff agreements are self-enforcing. Our main objective is to explore how the liberalization of trade between customs union members (i.e. the deepening of regional integration) affects the sustainability of tariff agreements with the rest of the world (ROW). We derive conditions under which Kemp–Wan [Kemp, M.C. and H. Wan, Jr., 1976, An elementary proposition concerning the formation of customs unions, Journal of International Economics 6, 95–97] adjustments in the external tariffs of union members result in self-enforcing tariff agreements with ROW and then use these adjustments to evaluate the general tariff-setting incentives of the two trading blocs.
Reprinted in: Eric W. Bond, (ed.) Trade Policy, Trade Agreements, and Economic Growth: Essays in International Trade Theory, World Scientific Studies in International Economics, 2017.
- "Customs Unions and Comparative Advantage," Oxford Economic Papers, 51:2, (April 1999), pp. 239-266. (Lead Article).
This paper constructs a simple, general equilibrium trade model to investigate how the formation of unconstrained, GATT-constrained, and Kemp-Wan customs unions affects inter-bloc tariffs and welfare. A central point of the paper is that the liberalization of intra-union trade creates incentives for all parties to reduce their remaining tariffs. Despite this, regional integration may not benefit non-member countries and, depending on trade patterns and comparative advantage, it may raise welfare of members more than a regime of globally free trade.
- "Complementarity in Contests" (with Stergios Skaperdas), European Journal of Political Economy, 14:4, (November 1998), pp. 667-684.
To facilitate the study of contests in general equilibrium, we examine winner-take-all contests in which the prize is complementary to the effort of the contestants, as inputs are in production functions or final goods in utility functions. We focus on the effects of technological factors and endowments on the effort and the welfare of the contestants. Most of our findings differ considerably from the standard model of contests in which prize and effort are independent. In particular, we find a critical role for the elasticity of substitution between prize and effort. For example, under low elasticities of substitution, a higher prize reduces the effort exerted by the contestants.
- "International Diffusion and Appropriability of Technological Expertise" (with Elias Dinopoulos) in M.R. Baye (ed.), Volume 7: Advances in Applied Microeconomics, pp. 115-137, JAI Press, 1998.
To the extent that technological expertise generates economic rents, it may be in the interest of those who lack it to appropriate it from those who possess it. Similarly, owners of intellectual property may find it desirable to control the degree to which knowledge is diffused. We study these issues in the context of a simple duopoly model in which a technology leader and a technology follower engage in one of two types of imperfectly discriminating contests: one in which they expend resources to influence the probability with which knowhow spills over to the technology follower; and another in which the two firms negotiate a technology licensing agreement but contest the magnitude of the lump-sum transfer associated with the license fee. Our analysis reveals that ex post both firms benefit from a licensing agreement only if the technological distance between them is sufficiently small. However, depending on their bargaining power and the degree of security of intellectual property, the follower may ex ante find the regime with technology licensing to be disadvantageous.
- "Tariffs and Schumpeterian Growth" (with Elias Dinopoulos), Journal of International Economics, 42:3, (May 1997), pp. 425-452.
The paper develops a dynamic multi-country, multi-commodity model of Schumpeterian growth, trade, and tariffs. The presence of a nontraded final good sector generates differences in long-run growth across countries. Furthermore, if the growth intensity of the nontraded good is lower than the growth intensity of traded goods, then the liberalization of trade raises the long-run growth of all trading partners. The paper also analyzes the implications of multilateral, bilateral and unilateral schemes of trade liberalization for long-run growth and welfare.
- "The Distribution of Income in the Presence of Appropriative Activities" (with Stergios Skaperdas), Economica, 64, (March 1997), pp. 101-117.
We examine the distribution of income when agents allocate their initial endowments between production and appropriation (arms investments, influence or rent‐seeking activities). Final output depends on the productive contributions of the agents but is divided between them according to their relative contributions in appropriation. Various possible improvements in an agent’s useful productivity reduce the agent’s equilibrium share of income, but increases in initial endowments increase an agent’s share. We contrast our results to those that would obtain in the competitive counterpart to our model and discuss its relevance both for history and for the present. The results extend to a class of models where distribution is determined between two groups of agents, with agents within each group behaving non‐cooperatively but without exhibiting the free‐rider problem.
- "Nontariff Trade Controls and Leader-Follower Relations in International Competition," Economica, 63, (November 1996), pp. 633-648.
A simple duopoly model is constructed in which leader-follower relations arise as part of a subgame-perfect equilibrium in a game of endogenous timing. I show that, in the absence of policy intervention, cost asymmetries between firms can help sustain collusive hierarchical organization of markets. On the basis of this model, I then analyse the effects of VERs and import quotas in the presence of foreign and international duopolies. My analysis reveals that, in contrast to the existing literature, these nontariff trade controls can break the stability of leader-follower relations and thereby raise an importing country's welfare.
- "On Pareto-Improving Voluntary Export Restraints," International Journal of Industrial Organization, 14:1, (1996), pp. 71-84.
This paper develops the argument that binding voluntary export restraints (VERs) may raise the profits of all firms and the welfare of all trading partners. This possibility is shown to arise in a model of Cournot oligopoly and is consistent with the theory of the second best. VERs benefit unconstrained firms. If the favorable effect due to the increase in domestic import price outweighs the adverse effect due to a loss in market share, then VERs will also benefit constrained firms. VERs will improve the importing country's welfare if they raise the profits of domestic firms more than they reduce domestic consumer surplus. The paper synthesizes these findings and derives conditions for VERs to be Pareto-improving.
- "Bilateral Trade Wars" (with Elias Dinopoulos and Mordechai E. Kreinin), International Trade Journal, 10, (Spring 1996), pp. 3-20. (Lead Article).
The paper constructs a three-country, two-good general equilibrium model to analyze the welfare effects of bilateral trade wars. The presence of a third country (or a number of countries) pursuing free trade policies alters several results based on a two-country framework: Regardless of whether tariffs or quotas are used, bilateral trade wars need not eliminate trade between the two retaliating countries; even a “small” retaliating country can win a bilateral trade war; and quotas can be welfare-superior to tariffs under bilateral retaliation.Reprinted in: K. Fatemi (ed.), International Trade in the 21st Century, Oxford: Elsevier Science, 1997.
- "The Size of Trading Blocs: Market Power and World Welfare Effects" (with Eric W. Bond), Journal of International Economics, 40:3, (May 1996), pp. 411-438.
We construct an n-country n-commodity trade model to analyze the implications of bloc size for (Nash) equilibrium tariffs and welfare. The relationship between the absolute size of (symmetric) trading blocs and their market power is ambiguous, and we illustrate how this relationship varies with model parameters. In contrast, sufficiently large increases in the relative size of a bloc enhance its relative market power and cause the welfare of its country members to rise above the free trade level. We establish the existence of an optimal bloc size, and study the dependence of optimal size on the parameters of the model.Reprinted in: Carsten Kowalczyk (ed.), Economic Integration and International Trade, Northampton, MA: Edward Elgar Publishing Limited, 1999. (Series: The International Library of Critical Writings in Economics).
- "Can the Shadow of the Future Harm Cooperation?" (with Stergios Skaperdas), Journal of Economic Behavior and Organization, 29:3, (May 1996), pp. 355-372. (Lead Article).
It is generally thought that in long-term relationships high valuations of the future are conducive to cooperation. In an intertemporal model of conflict, however, we demonstrate the possibility of the opposite effect: a longer shadow of the future may harm cooperation. In particular, we show that the degree of inefficiency is positively related to: (i) the agents' valuation of the future, (ii) potential growth rates in resources, (iii) the size of initial resource endowments, and (iv) the effectiveness of conflict.
- "Trading Blocs and the Sustainability of Inter-Regional Cooperation" (with Eric W. Bond) in M. Canzoneri, W.J. Ethier and V. Grilli (eds.), The New Transatlantic Economy, pp. 118-141, Centre for Economic Policy Research, London: Cambridge University Press, 1996.
- "Trade Liberalization and Trade Adjustment Assistance: Discussion" in M. Canzoneri, W.J. Ethier and V. Grilli (eds.), The New Transatlantic Economy, pp. 287-294, Centre for Economic Policy Research, London: Cambridge University Press, 1996.
- "Fortress Common Markets: Are They Welfare Improving?" (with Elias Dinopoulos) in C.C. Paraskevopoulos, R. Grinspun and T. Georgakopoulos (eds.), Economic Integration and Public Policy in the European Union, pp. 47-60, London: Edward Elgar Publishing Limited, 1996.
- "On the Effects of Insecure Property" (with Stergios Skaperdas), Canadian Journal of Economics, 29, (April 1996), pp. S622-S626.
- "Implications of Preferential Trading Arrangements for Policy and Market Access," Canadian Journal of Economics, 29, (April 1996), pp. S401-S405.
- "Growth-Creating Trading Blocs" (with Elias Dinopoulos), Canadian Journal of Economics, 29, (April 1996), pp. S371-S375.
- "Competitive Trade with Conflict" (with Stergios Skaperdas) in M.R. Garfinkel and S. Skaperdas (eds.), The Political Economy of Conflict and Appropriation, pp. 73-95, New York: Cambridge University Press, 1996.
- "Gangs as Primitive States" (with Stergios Skaperdas) in G. Fiorentini and S. Peltzman (eds.), The Economics of Organized Crime, pp. 61-82, (Centre for Economic Policy Research) London: Cambridge University Press, 1995.
- "Bilateral Quota Wars" (with Elias Dinopoulos and Mordechai E. Kreinin), Canadian Journal of Economics, 28:4a, (November 1995), pp. 939-944.
In this paper we employ a three-country, two-good general equilibrium model to analyse bilateral quota wars. It is shown that the presence of a third country or a number of countries that trade freely leads to fundamentally different results of retaliation: bilateral quota wars need not eliminate either multilateral or bilateral trade flows. This result generates several interesting implications for the ranking of policy instruments and the likelihood of winning trade wars.
- "Endogenous Timing in Games of Commercial Policy," Canadian Journal of Economics, 27:4, (November 1994), pp. 847-864.
This paper analyses various equilibria associated with intervention in trade in the context of non-cooperative policy games with endogenous timing. It is shown that, while the subgame perfect equilibria in quota games always involve sequential play, that is not necessarily the case in tariff games. One implication of the analysis is that, in contrast to existing theory, trade is not eliminated in quota games. Another implication is that quotas are not necessarily inferior to tariffs. The paper also examines the ways policy leaders and followers differ in their preferences over instruments and allows the choice over instruments to be determined endogenously.
- "Quantitative Restrictions and Tariffs with Endogenous Firm Behavior," European Economic Review, 36:8, (December 1992), pp. 1627-1646.
This paper considers a foreign oligopoly which dominates an importing country's market with its exports of differentiated products. It constructs a model where firm behavior is endogenously determined in an infinitely repeated game and it analyzes the impact of trade policies on market conduct and welfare. Optimal tariffs, optimal quotas and optimal tariff-quotas are characterized and compared. One result is that quotas can enhance competition and increase welfare. Another result is that quotas can be superior to tariffs. Finally, optimal tariff-quotas are welfare superior to either tariffs or quotas alone.
- "The Global Sanctions Data Base" (with Gabriel Felbermayr, Aleksandra Kirilakha, Erdal Yalcin and Yoto V. Yotov), VoxEU.org, August 4, 2020.
- "Quantifying the Impact of Economic Sanctions on International Trade in the Energy and Mining Sectors" (with Mario Larch, Serge Shikher and Yoto V. Yotov)
Capitalizing on the latest developments in the gravity literature, we utilize two new datasets on sanctions and trade to study the impact of economic sanctions on international trade in the mining sector, which includes oil and natural gas. We demonstrate that the gravity equation is well suited to model bilateral trade in mining and find that sanctions have been effective in impeding mining trade. Our analysis reveals that complete trade sanctions have reduced bilateral mining trade by about 44 percent on average. We also document the presence of significant heterogeneity in the effects of sanctions on mining trade across mining industries and across sanction episodes/cases, depending on the sanctioning and sanctioned countries, the type of sanctions used, and the direction of trade flows. We take a close look at the impact of recent sanctions on Iran and Russia.
- "On Trade and the Stability of Peace" (with Michelle R. Garfinkel)
We consider an environment in which two sovereign states with overlapping ownership claims on a resource/asset first arm and then choose whether to resolve their dispute violently through war or peacefully through settlement. Both approaches depend on the states' military capacities, but have very different outcomes. War precludes trade between the two states and can be destructive; however, once a winner is declared, arming is unnecessary in future periods. By contrast, a peaceful resolution under the threat of war today avoids destruction and supports mutually advantageous trade; yet, settlements must be renegotiated and that could require countries to arm in future periods as well as in the current period, whereby they can resolve their ongoing dispute. In this setting, we explore the conditions under which peace arises as the perfectly coalition-proof equilibrium over time. We find that, depending on the destructiveness of war, time preferences, and the initial distribution of resource endowments, greater gains from trade can reduce arming and pacify international tensions. Even when the gains from trade are relatively small, peace might be sustainable, but only for more uneven distributions.
- "Preferential Trade Liberalization with Endogenous Cartel Discipline: Implications for Welfare and Optimal Trade Policies" (with Delina Agnosteva and Yoto V. Yotov)
We consider an international cartel whose members interact repeatedly in their own as well as in third-country segmented markets. Cartel discipline - an inverse measure of the degree of competition between firms - is endogenously determined by the cartel's incentive compatibility constraint (ICC), which links strategically markets that are seemingly unrelated. Owing to this linkage, trade cost reductions induce cartel members to adjust their sales, not only due to direct effects, but also due to spillover effects. We apply these ideas to preferential trade agreements (PTAs) and show that the indirect effects can give rise to trade diversion. We also characterize the welfare effects of preferential tariff cuts for all countries under various circumstances regarding the determination of external PTA trade policy. A persistent finding is that, in the absence of appropriate regulation, preferential trade liberalization can be welfare-reducing even when external policy is jointly optimal.
- "Self-Enforcing Peace Agreements that Preserve the Status Quo" (with Michelle R. Garfinkel)
On the basis of a single-period, guns-versus-butter, complete-information model in which two agents dispute control over an insecure portion of their combined output, we study the choice between a peace agreement that maintains the status quo without arming (or unarmed peace) and open conflict (or war) that is possibly destructive. With a focus on outcomes that are immune to both unilateral deviations and coalitional deviations, we find that, depending on war’s destructive effects, the degree of output security and the initial distribution of resources, peace can, but need not necessarily, emerge in equilibrium. We also find that, ex ante resource transfers without commitments can improve the prospects for peace, but only when the configuration of parameters describing the degree of output security and the degree of war’s destruction ensure the possibility of peace without such transfers at least for some sufficiently even initial resource distributions.
- "On the Heterogeneous Effects of Sanctions on Trade and Welfare: Evidence from the Sanctions on Iran and a New Database" (with Gabriel Felbermayr, Erdal Yalcin and Yoto V. Yotov)
Using a new, comprehensive database, we study the impact of sanctions on international trade and welfare. Specifically, capitalizing on the latest developments in the structural gravity literature, we quantify the partial and general equilibrium effects of sanctions. Starting with a broad evaluation of the impact of sanctions, we carefully investigate the case of Iran. We find that the effects are significant but also widely heterogeneous across sanctioning countries and dependent on the direction of trade, even within the European Union. We also perform a counterfactual analysis of removing the sanctions on Iran, which translates our partial estimates into sizable and heterogeneous (across both countries and sectors), but also intuitive, general equilibrium effects within the same framework.
- "Prudence versus Predation and the Gains from Trade" (with Michelle R. Garfinkel and Thomas Zylkin)
We analyze a dynamic, two-country model that highlights the various trade-offs each country faces between current consumption and competing investments in its future productive and military capacities as it prepares for a possible future conflict. Our focus is on the circumstances under which the effects of current trade between the two countries on the future balance of power render trade unappealing to one of them. We find that a positive probability of future conflict induces the country with less resource wealth to “prey” on the relatively more “prudent” behavior of its richer rival, and more so as conflict becomes more likely. While a shift from autarky to trade always raises the current incomes of both countries, the poorer country realizes the relatively larger income gain from trade and also devotes a relatively larger share of its income gain towards arming. Consequently, the richer country rationally chooses not to trade today when the difference in initial resource wealth is sufficiently large and is more likely to prefer autarky when the probability of future conflict is higher. An empirical analysis of the period surrounding the end of the Cold War provides suggestive evidence in support of the theory.
- "Multimarket Linkages, Cartel Discipline and Trade Costs" (with Delina Agnosteva and Yoto V. Yotov)
We build a model of tacit collusion to study the importance of trade costs in multimarket interactions. We show that cartel discipline, which is endogenously determined via the cartel's incentive compatibility constraint, connects otherwise segmented markets strategically and serves as a salient channel through which the effects of trade costs on cartel shipments and welfare travel. With the help of an extensive and newly constructed dataset on international cartels and international trade, we then substantiate empirically that trade costs exert a negative and significant effect on cartel discipline. In turn, cartel discipline has a negative and significant impact on trade ows.
- "Globalization, Factor Endowments and Scale-Invariant Growth" (with Elias Dinopoulos)
The paper develops a two-country dynamic general-equilibrium model of growth without scale effects to explore the effects of globalization on long-run growth and wages. Higher quality products are endogenously discovered through stochastic and sequential global innovation contests in which challengers devote resources to R&D and technology leaders undertake rent-protection activities (RPAs) to prolong the expected duration of temporary monopoly power by frustrating the R&D effort of challengers. Globalization (i.e., a move from autarky to an integrated trading equilibrium) for two countries with identical relative factor abundance and possible differences in size does not affect the long-run growth rate of either country. However, the country that is abundant in the factor used intensively in the production of R&D services grows faster in autarky. Moreover, factor prices (adjusted for quality) and national long-run growth rates converge and are eventually equalized. Depending on international per-capita differences in factor abundance, the model also generates intra-sectoral trade, vertical and horizontal multinationals, and international outsourcing of services (R&D investment or RPAs). The growth effects of globalization between countries with different relative factor endowments are larger for smaller countries.
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