How Cool is C.O.O.L.?

Posted: 4 Nov 2005

See all articles by Elias Dinopoulos

Elias Dinopoulos

Department of Economics; University of Florida - Warrington College of Business Administration - Department of Economics

Grigorios Livanis

University of Florida - Warrington College of Business Administration - Department of Economics; Northeastern University - International Business & Strategy

Carol Taylor West

University of Florida - Warrington College of Business Administration - Department of Economics

Date Written: July 12, 2005

Abstract

This paper develops a partial equilibrium model of a small open-economy producing and trading an unsafe product that is supplied by perfectly competitive producers. The presence of product safety considerations, in this case risks to health, introduces a wedge between the market prices producers receive and the higher risk-adjusted prices consumers respond to. The size of the wedge depends positively on the per-unit cost of illness and the proportion of unsafe units embodied in the parent risky product. The model is used to analyze the welfare effects of trade with and without a country-of-origin labeling (COOL) program. Assuming imports are less safe than domestic production, the welfare gains from trade in the absence of COOL are ambiguous and may justify the imposition of a trade ban. Even if a full ban does not improve welfare, some restriction of trade is always welfare-enhancing. These outcomes derive from an informational distortion that prevents consumers from distinguishing the different country-specific risks embodied in the foreign and domestic products resulting in a pooling equilibrium. The presence of a COOL program removes the informational distortion and generates a welfare maximizing separating equilibrium in which the safer (domestic) product commands a higher market price. In the presence of a COOL program, more trade - caused by a reduction in protection - is better than less trade.

Keywords: Country-of-origin labeling, protection, product safety, welfare

JEL Classification: F10, F13, L15

Suggested Citation

Dinopoulos, Elias and Livanis, Grigorios and West, Carol Taylor, How Cool is C.O.O.L.? (July 12, 2005). Available at SSRN: https://ssrn.com/abstract=838964 or http://dx.doi.org/10.2139/ssrn.838964

Elias Dinopoulos (Contact Author)

Department of Economics ( email )

Gainesville, FL 32610-0496
United States

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32611-7140
United States
352-392-8150 (Phone)
352-392-7860 (Fax)

Grigorios Livanis

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

224 Matherly Hall
P.O. Box 117140
Gainesville, FL 32611-7140
United States

HOME PAGE: http://plaza.ufl.edu/livanis/

Northeastern University - International Business & Strategy ( email )

Boston, MA 02115
United States

Carol Taylor West

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

Gainesville, FL 32611-7140
United States

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