Profits, Scale Economies, and the Gains from Trade and Industrial Policy
American Economic Review
vol. 113,
no. 10, October 2023
(pp. 2759-2808)
Abstract
This paper examines the efficacy of second-best trade restrictions at correcting sectoral misallocation due to scale economies or profit-generating markups. To this end, we characterize optimal trade and industrial policies in an important class of quantitative trade models with scale effects and profits, estimating the structural parameters that govern policy outcomes. Our estimates reveal that standalone trade policy measures are remarkably ineffective at correcting misallocation, even when designed optimally. Unilateral adoption of corrective industrial policies is also ineffective due to immiserizing growth effects. But industrial policies coordinated internationally via a deep agreement are more transformative than any unilateral policy alternative.Citation
Lashkaripour, Ahmad, and Volodymyr Lugovskyy. 2023. "Profits, Scale Economies, and the Gains from Trade and Industrial Policy." American Economic Review, 113 (10): 2759-2808. DOI: 10.1257/aer.20210419Additional Materials
JEL Classification
- F12 Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F13 Trade Policy; International Trade Organizations
- F14 Empirical Studies of Trade
- L52 Industrial Policy; Sectoral Planning Methods
- O19 International Linkages to Development; Role of International Organizations
- O25 Industrial Policy