Government Policies in a Granular Global Economy

37 Pages Posted: 15 Mar 2021 Last revised: 9 Jul 2021

See all articles by Cecile Gaubert

Cecile Gaubert

University of California, Berkeley - Department of Economics

Oleg Itskhoki

Princeton University - Department of Economics

Maximilian Vogler

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: March 2021

Abstract

We use the granular model of international trade developed in Gaubert and Itskhoki (2020) to study the rationale and implications of three types of government interventions typically targeted at large individual firms -- antitrust, trade and industrial policies. We find that in antitrust regulation, governments face an incentive to be overly lenient in accepting mergers of large domestic firms, which acts akin to beggar-thy-neighbor trade policy in sectors with strong comparative advantage. In trade policy, targeting large individual foreign exporters rather than entire sectors is desirable from the point of view of a national government. Doing so minimizes the pass-through of import tariffs into domestic consumer prices, placing a greater portion of the burden on foreign producers. Finally, we show that subsidizing `national champions' is generally suboptimal in closed economies as it leads to an excessive build-up of market power, but it may become unilaterally welfare improving in open economies. We contrast unilaterally optimal policies with the coordinated global optimal policy and emphasize the need for international policy cooperation in these domains.

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Suggested Citation

Gaubert, Cecile and Itskhoki, Oleg and Vogler, Maximilian, Government Policies in a Granular Global Economy (March 2021). NBER Working Paper No. w28553, Available at SSRN: https://ssrn.com/abstract=3804551

Cecile Gaubert (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Oleg Itskhoki

Princeton University - Department of Economics ( email )

Fisher 306
Princeton, NJ 08544-1021
United States
+1 (609) 258-5493 (Phone)

HOME PAGE: http://www.princeton.edu/~itskhoki

Maximilian Vogler

Princeton University

22 Chambers Street
Princeton, NJ 08544-0708
United States

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