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Trade in the Shadow of Power

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Author Info

  • Michelle R. Garfinkel

    ()
    (Department of Economics, University of California-Irvine)

  • Stergios Skaperdas

    ()
    (Department of Economics, University of California-Irvine)

  • Constantinos Syropoulos

    ()
    (Department of Economics and International Business, Drexel University)

Abstract

In this chapter, we examine how some of the main results in international trade theory fare when we abandon the traditional assumption of third-party enforcement of property rights. Without such enforcement, countries arm and exercise power to secure resources used in production or to secure the output from that production. Because arming is endogenous and takes scarce resources to produce, the production of final goods is also endogenous. Consequently, prices in either domestic or international markets reflect not only preferences, endowments or technologies of production as predicted by traditional models, but also arming and the power that comes from that. As we show in the context of a Ricardian model, those countries that produce the most socially valued goods tend to arm less, giving them a "comparative disadvantage" in power. Accordingly, the level of welfare obtained by these countries could be lower than that obtained in a competitive economy with perfect security. In the context of a Heckscher-Ohlin model, we find that free trade need not be preferred to autarky, as the costs of conflict or self-enforcement swamp the familiar gains from trade for a certain range of world prices. Finally, trade in the shadow of power can distort comparative advantage.

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File URL: http://www.economics.uci.edu/files/economics/docs/workingpapers/2010-11/garfinkel-5.pdf
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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101105.

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Length: 27 pages
Date of creation: Nov 2010
Date of revision: Jan 2011
Handle: RePEc:irv:wpaper:101105

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Related research

Keywords: Trade openness; Property rights; Interstate disputes; Conflict;

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  1. Michelle R. Garfinkel & Stergios Skaperdas & Constantinos Syropoulos, 2006. "Globalization and Domestic Conflict," Working Papers 050601, University of California-Irvine, Department of Economics.
  2. Pedro DalBo & Ernesto DalBo, 2004. "Workers, Warriors and Criminals: Social Conflict in General Equilibrium," Working Papers 2004-11, Brown University, Department of Economics.
  3. Michelle R. Garfinkel & Stergios Skaperdas & Constantinos Syropoulos, 2011. "Trade and Insecure Resources," Working Papers 111201, University of California-Irvine, Department of Economics, revised Sep 2013.
  4. Michael McBride & Gary Milante & Stergios Skaperdas, 2011. "Peace and War With Endogenous State Capacity," Journal of Conflict Resolution, Peace Science Society (International), vol. 55(3), pages 446-468, June.
  5. Stergios Skaperdas & Constantinos Syropoulos, 2001. "Guns, Butter, and Openness: On the Relationship between Security and Trade," American Economic Review, American Economic Association, vol. 91(2), pages 353-357, May.
  6. Skaperdas, Stergios & Syropoulos, Constantinos, 1997. "The Distribution of Income in the Presence of Appropriative Activities," Economica, London School of Economics and Political Science, vol. 64(253), pages 101-17, February.
  7. Francis Bloch, 2009. "Endogenous formation of alliances in conflicts," Working Papers hal-00435387, HAL.
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