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Uncertainty, Optimal Specialization and Growth

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  • Michele Di Maio
  • Marco Valente

Abstract

We present a novel argument demonstrating that when trade is characterized by uncertainty the comparative advantages doctrine is misleading and a positive level of diversification is growth enhancing. Applying a result developed in the mathematical biological literature, we show that, in Ricardian trade model in which capital available for investment depends on previous periods returns, incomplete specialization is optimal. We also demonstrate that, in this case, the decentralized solution is characterized by an inefficiently high level of specialization with respect to the social optimal one. Finally, we present a taxation scheme that, reconciling individual incentives and social optimum, is able to induce individual agents to adopt the optimal specialization strategy, i.e. the one that maximizes the country growth rate.

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Bibliographic Info

Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2006/05.

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Date of creation: 14 Feb 2006
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Handle: RePEc:ssa:lemwps:2006/05

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Keywords: Uncertainty; Specialization; Growth; Government;

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References

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  1. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Saint-Paul, Gilles, 1992. "Technological choice, financial markets and economic development," European Economic Review, Elsevier, Elsevier, vol. 36(4), pages 763-781, May.
  3. Pagano Ugo & Samuel Bowles, 2003. "Economic Integration, Cultural Standardization,and the Politics of Social Insurance," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp64, Political Economy Research Institute, University of Massachusetts at Amherst.
  4. Hans-Werner Sinn, 1995. "Social Insurance, Incentives, and Risk Taking," NBER Working Papers 5335, National Bureau of Economic Research, Inc.
  5. Luis A. Rivera-Batiz & Paul M. Romer, 1991. "International Trade with Endogenous Technological Change," NBER Working Papers 3594, National Bureau of Economic Research, Inc.
  6. Redding, Stephen, 1999. "Dynamic Comparative Advantage and the Welfare Effects of Trade," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 15-39, January.
  7. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(1), pages 1-12, January.
  8. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. S. Lael Brainard, 1991. "Protecting Losers: Optimal Diversification, Insurance, and Trade Policy," NBER Working Papers 3773, National Bureau of Economic Research, Inc.
  10. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 483-99, June.
  11. Brainard, William C. & Cooper, Richard N., 1968. "Uncertainty and Diversification in International Trade," Food Research Institute Studies, Stanford University, Food Research Institute, Stanford University, Food Research Institute, issue 03.
  12. Ruffin, Roy J., 1974. "International trade under uncertainty," Journal of International Economics, Elsevier, Elsevier, vol. 4(3), pages 243-259, August.
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Cited by:
  1. Morsello, Carla & Delgado, Juliana Aparecida da Silva & Fonseca-Morello, Thiago & Brites, Alice Dantas, 2014. "Does trading non-timber forest products drive specialisation in products gathered for consumption? Evidence from the Brazilian Amazon," Ecological Economics, Elsevier, Elsevier, vol. 100(C), pages 140-149.

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