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Profits, Scale Economies, and the Gains from Trade and Industrial Policy

Author

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  • Ahmad Lashkaripour
  • Volodymyr Lugovskyy

Abstract

This paper examines the efficacy of second-best trade restrictions at correcting sectoral misallocation due to scale economies or profit-generating markups. To this end, we characterize optimal trade and industrial policies in an important class of quantitative trade models with scale effects and profits, estimating the structural parameters that govern policy outcomes. Our estimates reveal that standalone trade policy measures are remarkably ineffective at correcting misallocation, even when designed optimally. Unilateral adoption of corrective industrial policies is also ineffective due to immiserizing growth effects. But industrial policies coordinated internationally via a deep agreement are more transformative than any unilateral policy alternative.

Suggested Citation

  • Ahmad Lashkaripour & Volodymyr Lugovskyy, 2023. "Profits, Scale Economies, and the Gains from Trade and Industrial Policy," American Economic Review, American Economic Association, vol. 113(10), pages 2759-2808, October.
    • Handle: RePEc:aea:aecrev:v:113:y:2023:i:10:p:2759-2808
    DOI: 10.1257/aer.20210419
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    Citations

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    Cited by:

    1. Watabe,Yuta & Sogalla,Robin & Wanner,Joschka, 2024. "New Trade Models, Same Old Emissions?," IDE Discussion Papers 926, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. Feng Dong & Yang Jiao & Haoning Sun, 2024. "Bubbly Booms and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 53, pages 71-122, July.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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