Optimal Trade Policy with Monopolistic Competition and Heterogeneous Firms

26 Pages Posted: 17 Nov 2014

See all articles by Jan I. Haaland

Jan I. Haaland

Norwegian School of Economics (NHH) - Department of Economics; Centre for Economic Policy Research (CEPR)

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2014

Abstract

This paper derives optimal trade and domestic taxes for a small open economy containing a monopolistically competitive (MC) sector in which firms may have heterogeneous productivity levels. Domestic protection brings gains from expanding the number of product varieties on offer, but these gains (and the corresponding rates of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign exporters who may withdraw from the market. Our analysis encompasses special cases in which the domestic MC sector can expand or contract flexibly, or is of fixed size. In the latter case gains from protection arise from terms of trade effects and, since various margins of substitution are switched off, only the relative values of domestic taxes, import tariffs and export taxes matter.

Keywords: heterogeneous firms, monopolistic competition, productivity, terms of trade, trade policy, variety

JEL Classification: F12, F13

Suggested Citation

Haaland, Jan I. and Venables, Anthony J., Optimal Trade Policy with Monopolistic Competition and Heterogeneous Firms (October 2014). CEPR Discussion Paper No. DP10219. Available at SSRN: https://ssrn.com/abstract=2526327

Jan I. Haaland (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
Bergen, N-5045
Norway
+4755959255 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Anthony J. Venables

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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