Optimal Domestic Regulation and the Pattern of Trade

37 Pages Posted: 28 Dec 2004

See all articles by David Martimort

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Thierry Verdier

Paris School of Economics (PSE); Delta - Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Date Written: October 2004

Abstract

This Paper analyzes the impact of asymmetric information within countries on the pattern of international trade. We append to the standard 2x2 Heckscher-Ohlin model of a small economy a continuum of sectors producing intermediate non-tradable goods. Those goods are produced by monopolies having private information on their technologies. With asymmetric information and under optimal regulation, production in these sectors is inefficiently low. The small open country is relatively richer in the factor that is more intensively used by the privately informed sectors. Asymmetric information can reverse the country's pattern of comparative advantages. Due to the existence of information rents in these sectors, the economy does not only receive the standard factor endowments (capital and labor) but also an 'informational endowment' which boosts demand for tradable goods. Free trade with optimal regulation is Pareto dominated by autarky with optimal regulation when, under asymmetric information, there is a reversal of comparative advantages. This result suggests that optimal 'behind-the-border' regulatory policies cannot be considered separately from trade policy instruments, when regulation is characterized by serious problems of asymmetric information.

JEL Classification: D82, F11, L51

Suggested Citation

Martimort, David and Verdier, Thierry, Optimal Domestic Regulation and the Pattern of Trade (October 2004). CEPR Discussion Paper No. 4700. Available at SSRN: https://ssrn.com/abstract=639242

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Thierry Verdier (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014
France

Delta - Ecole Normale Superieure (ENS) ( email )

48, Boulevard Jourdan
75014 Paris
France
+33 1 4313 6308 (Phone)
+33 1 4313 6310 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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