Reference Point Dependence for Specification Bias from Quality Upgrading
affiliation not provided to SSRN
University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)
NBER Working Paper No. w4816
This paper argues that whether estimates of the welfare cost of natural or artificial trade barriers that do not discriminate by quality are subject to positive or negative specification bias when using models which do not explicitly recognize quality variation depends on the reference point used in counterfactual equilibrium analysis. We use numerical general equilibrium techniques to generate counter examples to the widely held view that (in the competitive case) incorporating quality upgrading will tend to reduce the welfare costs of quality invariant trade barriers. To do this, we use a trade-distorted equilibrium as the reference point, rather than free trade.
Number of Pages in PDF File: 22
Date posted: August 31, 2010