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Optimal Tariffs, Tariff Jumping, and Heterogeneous Firms

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Author Info

  • Matthew T Cole

    (University College Dublin)

  • Ronald B Davies

    (University College Dublin)

Abstract

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.

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File URL: http://www.ucd.ie/t4cms/wp09.19.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200919.

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Length: 36 pages
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:ucn:wpaper:200919

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Keywords: Intra-industry Trade; Trade policy; Firm heterogeneity; Monopolistic competition;

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References

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  1. Blanchard, Emily J., 2010. "Reevaluating the role of trade agreements: Does investment globalization make the WTO obsolete?," Journal of International Economics, Elsevier, vol. 82(1), pages 63-72, September.
  2. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Davies, Ronald B. & Eckel, Carsten, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," Munich Reprints in Economics 20021, University of Munich, Department of Economics.
  5. Blonigen, Bruce A & Figlio, David N, 1998. "Voting for Protection: Does Direct Foreign Investment Influence Legislator Behavior?," American Economic Review, American Economic Association, vol. 88(4), pages 1002-14, September.
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  8. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  9. Jan Haaland & Ian Wooton, 1998. "Antidumping jumping: Reciprocal antidumping and industrial location," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(2), pages 340-362, June.
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  11. Bruce Blonigen & KaSaundra Tomlin & Wesley Wilson, 2004. "Tariff-jumping FDI and domestic firms' profits," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 656-677, August.
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  15. Sébastien Jean, 2002. "International Trade and Firms' Heterogeneity under Monopolistic Competition," Open Economies Review, Springer, vol. 13(3), pages 291-311, July.
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  17. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
  18. Ellingsen, T. & Warneryd, K., 1993. "Foreign direct investment and the political economy of protection," Discussion Paper 1993-8, Tilburg University, Center for Economic Research.
  19. Mario Larch, 2008. "Endogenous Tariffs in the Presence of Multinationals," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(3), pages 534-567, September.
  20. Jørgensen Jan Guldager & Schröder Philipp J. H., 2006. "Tariffs and Firm-Level Heterogeneous Fixed Export Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-17, July.
  21. Ludema, Rodney D., 2002. "Increasing returns, multinationals and geography of preferential trade agreements," Journal of International Economics, Elsevier, vol. 56(2), pages 329-358, March.
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Citations

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Cited by:
  1. Christian Josef Bauer & Dominika Langenmayr, 2012. "Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?," CESifo Working Paper Series 3967, CESifo Group Munich.
  2. Bauer, Christian & Davies, Ronald B. & Haufler, Andreas, 2011. "Economic integration and the optimal corporate tax structure with heterogeneous firms," Discussion Papers in Economics 12310, University of Munich, Department of Economics.
  3. Silvio Contessi, 2010. "What happens when Wal-Mart comes to your country? multinational firms' entry, productivity, and inefficiency," Working Papers 2010-043, Federal Reserve Bank of St. Louis.
  4. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Munich Reprints in Economics 20591, University of Munich, Department of Economics.
  5. Ronald Davies & Lourenço Paz, 2011. "Tariffs versus VAT in the presence of heterogeneous firms and an informal sector," International Tax and Public Finance, Springer, vol. 18(5), pages 533-554, October.
  6. Pflüger, Michael P. & Russek, Stephan, 2010. "Trade and Industrial Policies with Heterogeneous Firms: The Role of Country Asymmetries," IZA Discussion Papers 5387, Institute for the Study of Labor (IZA).
  7. Anna Bohnstedt, 2013. "Spillovers from Foreign Exporters," Ruhr Economic Papers 0400, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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