How Cool is C.O.O.L.?
This paper develops a partial equilibrium model of a small open-economy producing and trading an unsafe product that is supplied by perfectly competitive producers. The presence of product safety considerations, in this case risks to health, introduces a wedge between the market prices producers receive and the higher risk-adjusted prices consumers respond to. The size of the wedge depends positively on the per-unit cost of illness and the proportion of unsafe units embodied in the parent risky product. The model is used to analyze the welfare effects of trade with and without a country-of-origin labeling (COOL) program. Assuming imports are less safe than domestic production, the welfare gains from trade in the absence of COOL are ambiguous and may justify the imposition of a trade ban. Even if a full ban does not improve welfare, some restriction of trade is always welfare-enhancing. These outcomes derive from an informational distortion that prevents consumers from distinguishing the different country-specific risks embodied in the foreign and domestic products resulting in a pooling equilibrium. The presence of a COOL program removes the informational distortion and generates a welfare maximizing separating equilibrium in which the safer (domestic) product commands a higher market price. In the presence of a COOL program, more trade caused by a reduction in protection is better than less trade.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.iatpc.ifas.ufl.edu/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eugene Beaulieu & James Gaisford, 2002. "Labour and Environmental Standards: The 'Lemons Problem' in International Trade Policy," The World Economy, Wiley Blackwell, vol. 25(1), pages 59-78, 01.
- Chisik, Richard, 2003.
"Export industry policy and reputational comparative advantage,"
Journal of International Economics,
Elsevier, vol. 59(2), pages 423-451, March.
- Richard Chisik, 2010. "Export Industry Policy and Reputational Comparative Advantage," Working Papers 017, Ryerson University, Department of Economics.
- Peter L. Rodriguez, 2001. "Rules of Origin with Multistage Production," The World Economy, Wiley Blackwell, vol. 24(2), pages 201-220, 02.
- Raff, Horst & Kim, Young-Han, 1999. "Optimal export policy in the presence of informational barriers to entry and imperfect competition," Journal of International Economics, Elsevier, vol. 49(1), pages 99-123, October.
- Walter Y. Oi, 1973. "The Economics of Product Safety," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 3-28, Spring.
- Kyle Bagwell & R. Staiger, 1987.
"The Role of Export Subsidies When Product Quality is Unknown,"
758, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bagwell, Kyle & Staiger, Robert W., 1989. "The role of export subsidies when product quality is unknown," Journal of International Economics, Elsevier, vol. 27(1-2), pages 69-89, August.
- Kyle Bagwell & Robert W. Staiger, 1988. "The Role Of Export Subsisies When Product Quality Is Unknown," NBER Working Papers 2584, National Bureau of Economic Research, Inc.
- Bagwell, Kyle, 1991.
"Optimal Export Policy for a New-Product Monopoly,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1156-69, December.
- Kala Krishna, 2005. "Understanding Rules of Origin," NBER Working Papers 11150, National Bureau of Economic Research, Inc.
- Anne O. Krueger, 1993. "Free Trade Agreements as Protectionist Devices: Rules of Origin," NBER Working Papers 4352, National Bureau of Economic Research, Inc.
- Krueger, Anne O., 1997.
"Free trade agreements versus customs unions,"
Journal of Development Economics,
Elsevier, vol. 54(1), pages 169-187, October.
- Andrew F. Daughety & Jennifer F. Reinganum, 1994.
"Product Safety: Liability, R&D and Signaling,"
Game Theory and Information
9403007, EconWPA, revised 30 Mar 1994.
- Boom, Anette, 1998. "Product risk sharing by warranties in a monopoly market with risk-averse consumers," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 241-257, January.
- Nicholas E. Piggott & Thomas L. Marsh, 2004. "Does Food Safety Information Impact U.S. Meat Demand?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 154-174.
- Lopez-de-Silanes, Florencio & Markusen, James R. & Rutherford, Thomas F., 1996. "Trade policy subtleties with multinational firms," European Economic Review, Elsevier, vol. 40(8), pages 1605-1627, November.
- Falvey, Rodney E, 1989. "Trade, Quality Reputations and Commercial Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 607-22, August.
- M. K. Haener & Martin K. Luckert, 1998. "Forest Certification: Economic Issues and Welfare Implications," Canadian Public Policy, University of Toronto Press, vol. 24(s2), pages 83-94, May.
- Donnenfeld, Shabtai & Weber, Shlomo & Ben-Zion, Uri, 1985. "Import controls under imperfect information," Journal of International Economics, Elsevier, vol. 19(3-4), pages 341-354, November.
- Gaisford, James D. & Chui-Ha, Carol Lau, 2000. "The Case For and Against Import Embargoes on Products of Biotechnology," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 1(01).
- Rod Falvey & Geoff Reed, .
"Rules of Origin as Commercial Policy Instruments,"
EPRU Working Paper Series
97-20, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Jeffrey R. Blend & Eileen O. van Ravenswaay, 1999. "Measuring Consumer Demand for Ecolabeled Apples," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(5), pages 1072-1077.
- Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
- P. J. Lloyd, 1993. "A Tariff Substitute for Rules of Origin in Free Trade Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 699-712, November.
When requesting a correction, please mention this item's handle: RePEc:ags:uflowp:15658. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.