Geography, Competition, and Optimal Multilateral Trade Policy

38 Pages Posted: 14 Mar 2019

See all articles by Antonella Nocco

Antonella Nocco

Università del Salento (Lecce) Dipartimento di Scienze Economiche e Matematico-Statistiche

Gianmarco Ireo Paolo Ottaviano

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Matteo Salto

Directorate-General COMP, European Commission

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use 'disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.

Keywords: international trade policy, monopolistic competition, firm heterogeneity, pricing to market, multilateralism

JEL Classification: D4, D6, F1, L0, L1

Suggested Citation

Nocco, Antonella and Ottaviano, Gianmarco Ireo Paolo and Salto, Matteo, Geography, Competition, and Optimal Multilateral Trade Policy (March 2019). BAFFI CAREFIN Centre Research Paper No. 2019-109. Available at SSRN: https://ssrn.com/abstract=3351906 or http://dx.doi.org/10.2139/ssrn.3351906

Antonella Nocco

Università del Salento (Lecce) Dipartimento di Scienze Economiche e Matematico-Statistiche ( email )

Piazza Tancredi, n7
Lecce, 73100
Italy

Gianmarco Ireo Paolo Ottaviano (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Matteo Salto

Directorate-General COMP, European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
23
Abstract Views
165
PlumX Metrics