Uncertainty, Arbitrage and Intra-Industry Trade

29 Pages Posted: 30 Dec 2002

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre

Kit Pong Wong

University of Hong Kong

Abstract

When firms in the same industry located in different regions or countries experience shocks to production costs in their respective industries that are imperfectly correlated, arbitrage opportunities automatically lead to trade. Trade can either stabilize or destabilize the price faced by producers in a given country. Producers' surplus is affected, owing to the "variance-covariance" effect, while consumers' surplus is more directly affected through the variance of the product price. We examine how consumers' surplus, producers' surplus, and social welfare are affected when the regions switch from autarky to free trade in the presence of industry and region-specific cost shocks.

JEL Classification: F10, D80

Suggested Citation

Dasgupta, Sudipto and Ray, Tridip and Wong, Keith Kit Pong, Uncertainty, Arbitrage and Intra-Industry Trade. Canadian Journal of Economics, Vol. 35, pp. 757-785, 2002. Available at SSRN: https://ssrn.com/abstract=342533

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre ( email )

7 S .J. S.
Sansanwal Marg
New Delhi, 110016
India

Keith Kit Pong Wong

University of Hong Kong ( email )

Faculty of Business and Economics
University of Hong Kong
Hong Kong, Nil Nil
Hong Kong
(852) 2859-1044 (Phone)
(852) 2548-1152 (Fax)

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