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Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods

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Di Maio, Michele

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Abstract

This paper analyzes the effects of increasing trade integration on individual utility when the international specialization pattern is stochastic, i.e. when the range of goods each country produces depends on the realization of a random variable. Using a Ricardian continuum of goods model it is shown that under uncertainty a trade-off emerges. As in the standard deterministic model, higher trade integration reduces prices and increases expected real income. However, higher trade integration, reducing the number of active sectors in the economy, also increases the displacement cost the worker suffers when the sector she is employed into has to close down because, ex-post, the foreign country's competing sector results to be more efficient. Two are the main results of the model. First, it is shown that, under uncertainty and job specificity, increasing trade integration is not always welfare enhancing. Second, there exists an optimal level of protection that is higher the smaller the price reduction induced by trade integration and the more technologically similar are countries.

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Publisher Info
Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 19 (2008)
Issue (Month): 4 (December)
Pages: 315-329
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Handle: RePEc:eee:streco:v:19:y:2008:i:4:p:315-329

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Web page: http://www.elsevier.com/locate/inca/525148

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Related research
Keywords: Uncertainty Trade integration Optimal protection Specialization Continuum of goods;

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References listed on IDEAS
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  1. Tom Krebs & Pravin Krishna, 2005. "Trade Policy, Income Risk and Welfare," 2005 Meeting Papers 271, Society for Economic Dynamics.
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  2. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December. [Downloadable!] (restricted)
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  3. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 1-12, January. [Downloadable!] (restricted)
  4. Imbs, Jean & Wacziarg, Romain, 2000. "Stages of Diversification," CEPR Discussion Papers 2642, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December. [Downloadable!] (restricted)
  6. Pagano Ugo & Samuel Bowles, 2003. "Economic Integration, Cultural Standardization,and the Politics of Social Insurance," Working Papers wp64, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
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  7. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September. [Downloadable!] (restricted)
  8. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
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