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Trade, Growth and Increasing Returns to Infrastructure: The Role of the Sophisticated Monopolist

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  • Ashok S. Guha

    ()
    (Indian Statistical Institute, India)

  • Brishti Guha

    ()
    (School of Economics, Singapore Management University)

Abstract

We consider a model of international trade with increasing returns in a non-traded input into industry, “infrastructure”, and show that the nature of equilibrium depends crucially on whether the infrastructure provider acts in a “naïve” manner – akin to a Level 1 agent in a cognitive hierarchy (C-H) model – or in a more sophisticated manner. Infrastructure requires a fixed investment and is produced under decreasing marginal costs, and we model two possible market forms, monopoly and Cournot oligopoly with free entry – both capable of generating pecuniary externalities in the manufacturing sector . Unlike most other work exploring the theme of increasing returns, we derive a unique closed economy equilibrium. In a small open economy, we show that with “naïve” infrastructure provider(s), multiple equilibria obtain. In this event whether or not a small open economy becomes an industrial exporter depends crucially on the presence of unexhausted economies of scale, and it is possible to have equilibria where manufactures are exported in spite of the world price of manufactures being lower than the autarky price. With a more sophisticated infrastructure provider, however, even an open economy has a unique equilibrium, which for a wide range of parameter values also involves a greater degree of industrialization than any of the “naïve” equilibria. For some parameter values, however, neither infrastructure nor manufacturing can develop and the economy remains totally agrarian.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 03-2008.

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Length: 33 pages
Date of creation: Feb 2008
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:03-2008

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