Gains from Trade in Used Goods: Evidence from Automobiles

Abstract

I investigate the welfare effects of trade liberalization by exploiting a natural policy experiment in the economy of Cyprus. A 1993 law relaxed import restrictions on used vehicles and enabled the importation of second-hand Japanese automobiles into the country. This led to a dramatic shift of consumer purchases from new to used cars and a substantial expansion of the overall market. Welfare gains computed from a structural demand system average $2,000 per purchaser in a four year period after the policy change. The findings are suggestive of the potential for substantial gains from liberalizing trade in used goods.

Keywords: Automobile industry, differentiated products, gains from trade, used goods, trade liberalization

JEL Classification: F14, L13, L92