Discrete Plant-Location Decisions in an Applied General-Equilibrium Model of Trade Liberalization

31 Pages Posted: 21 Aug 2007

See all articles by James R. Markusen

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Thomas F. Rutherford

Centre for Energy Policy and Economics

Date Written: October 1993

Abstract

Theoretical and applied work in industrial-organization approaches to international trade typically assume either that there are fixed numbers of firms, or that there is free entry and exit with a continuum of firms. This paper makes a first step toward a more realistic approach in which firms face discrete choices about the numbers and locations of their plants. The model is applied to the North American auto industry in the context of the draft North American Free Trade Agreement. Results include: (1) production appears to be excessively geographically diversified initially; (2) autos are produced in fewer locations as trade barriers are lowered; (3) a 'non-monotonicity' case is produced in which a plant is first closed and then reopened as trade barriers are progressively lowered; (4) an example of the misleading nature of marginalist analysis is presented in which plants in Canada and Mexico increase production when locations are fixed but closed down when locations are endogenous and optimized.

Suggested Citation

Markusen, James R. and Rutherford, Thomas F., Discrete Plant-Location Decisions in an Applied General-Equilibrium Model of Trade Liberalization (October 1993). NBER Working Paper No. w4513. Available at SSRN: https://ssrn.com/abstract=480264

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER) ( email )

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Thomas F. Rutherford

Centre for Energy Policy and Economics ( email )

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+41 (0)44/632 1622 (Fax)

HOME PAGE: http://www.cepe.ethz.ch/

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