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Regulatory Entry Barriers and Trade

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  • Tobal, Martin
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    Abstract

    This paper develops a New Trade Theory model modified with entry barriers, thereby creating a link between the traditional interests of development and industrial organization economists and research on international trade. I show that entry barriers cause the market size to become endogenous by creating rents. Furthermore, I prove that the endogeneity of market size has four implications. First, governments can use trade policy to shift foreign rents to their countries and enlarge their home markets. Second, endogenous market size magnifies the standard home-market effect. Third, the endogeneity of market size interferes with the unambiguous Pareto optimality of trade agreements. In particular, if rents are suffciently large and the country size is suffciently small, a trade agreement will negatively affect the country in question. Therefore, I consider a new research question: what are consequences of trade agreements in terms of welfare redistribution? Finally, I show that an increase in entry barriers increases the market size of large countries. If the market size increase is suffciently large, the country benefits. These results challenge the idea that higher entry barriers decrease welfare.

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    Bibliographic Info

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt6k8954nn.

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    Date of creation: 01 Oct 2011
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    Handle: RePEc:cdl:ucsdec:qt6k8954nn

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    Keywords: international trade; macro; Social and Behavioral Sciences;

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    1. Grossman, G.M. & Lai, E., 2001. "International Protection of intellectual Property," Papers 215, Princeton, Woodrow Wilson School - Public and International Affairs.
    2. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
    3. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
    4. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2003. "International Financial Integration," CEPR Discussion Papers 3769, C.E.P.R. Discussion Papers.
    5. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
    6. Norman Strong & Xinzhong Xu, 2003. "Understanding the Equity Home Bias: Evidence from Survey Data," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 307-312, May.
    7. Antonio Ciccone & Elias Papaioannou, 2007. "Red Tape and Delayed Entry," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 444-458, 04-05.
    8. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    9. Robert C. Feenstra & Zhiyuan Li & Miaojie Yu, 2011. "Exports and Credit Constraints Under Incomplete Information: Theory and Evidence from China," NBER Working Papers 16940, National Bureau of Economic Research, Inc.
    10. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    11. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
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