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The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust ry Revisited, 1979-1985

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  • Kala Krishna
  • Kathleen Hogan
  • Phillip Swagel

Abstract

We examine the sensitivity of simple calibration models of trade in imperfectly competitive industries to changes in model specification, as well as to changes in the calibration parameters. We find that not just the magnitude, but also the sign of the optimal trade policies is very sensitive to the change in model specification. Indeed, use of policies derived from the 'wrong' model can reduce welfare from the status quo. However, the welfare gains to be obtained from application of the 'correct' model remain limited. Calibration models nonetheless provide useful estimates of firm and market behavior over time, as well as disaggregated elasticities of demand. We conclude that careful empirical work is necessary to guide model selection. For the present, the case for activist trade policy on the basis of calibration models should not be made.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3118.

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Date of creation: Sep 1989
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Handle: RePEc:nbr:nberwo:3118

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  1. Kala Krishna & Motoshige Itoh, 1988. "Content Protection and Oligopolistic Interactions," NBER Working Papers 1843, National Bureau of Economic Research, Inc.
  2. Feenstra, R.C. & Levinsohn, J.A., 1989. "Distance, Demand, And Oligopoly Pricing," Working Papers 245, Research Seminar in International Economics, University of Michigan.
  3. Feenstra, Robert C, 1988. "Quality Change under Trade Restraints in Japanese Autos," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 131-46, February.
  4. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
  5. Richard E. Baldwin & Paul Krugman, 1986. "Market Access and International Competition: A Simulation Study of 16K Random Access Memories," NBER Working Papers 1936, National Bureau of Economic Research, Inc.
  6. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  7. de Melo, Jaime & Tarr, David, 1988. "Welfare costs of U.S. quotas on textiles, steel, and autos," Policy Research Working Paper Series 83, The World Bank.
  8. Kala Krishna & Marie Thursby, 1988. "Optimal Policies with Strategic Distortions," NBER Working Papers 2527, National Bureau of Economic Research, Inc.
  9. Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Inter-Industry Wage Differentials Justify Strategic Trade Policy?," NBER Working Papers 2739, National Bureau of Economic Research, Inc.
  10. Robert Driskill & Stephen McCafferty, 1989. "Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations," NBER Chapters, in: Trade Policies for International Competitiveness, pages 125-144 National Bureau of Economic Research, Inc.
  11. repec:fth:michin:245 is not listed on IDEAS
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Cited by:
  1. Phillip Swagel, 1996. "Union Behavior, Industry Rents, and Optimal Policies," IMF Working Papers 96/143, International Monetary Fund.
  2. Stiegert, Kyle W. & Wang, Shinn-Shyr, 2003. "Imperfect Competition And Strategic Trade Theory: What Have We Learned," Working Papers 14589, International Agricultural Trade Research Consortium.

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