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Optimal trade policy with monopolistic competition and heterogeneous firms

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  • Haaland, Jan I.
  • Venables, Anthony J

Abstract

This paper derives optimal trade and domestic taxes for a small open economy containing a monopolistically competitive (MC) sector in which firms may have heterogeneous productivity levels. Domestic protection brings gains from expanding the number of product varieties on offer, but these gains (and the corresponding rates of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign exporters who may withdraw from the market. Our analysis encompasses special cases in which the domestic MC sector can expand or contract flexibly, or is of fixed size. In the latter case gains from protection arise from terms of trade effects and, since various margins of substitution are switched off, only the relative values of domestic taxes, import tariffs and export taxes matter.

Suggested Citation

  • Haaland, Jan I. & Venables, Anthony J, 2014. "Optimal trade policy with monopolistic competition and heterogeneous firms," CEPR Discussion Papers 10219, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10219
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Takatsuka, Hajime & Zeng, Dao-Zhi, 2016. "Nontariff protection without an outside good," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 65-78.
    2. Arnaud Costinot & Andrés Rodríguez-Clare & Iván Werning, 2016. "Micro to Macro: Optimal Trade Policy with Firm Heterogeneity," NBER Working Papers 21989, National Bureau of Economic Research, Inc.
    3. repec:bla:reviec:v:26:y:2018:i:4:p:768-783 is not listed on IDEAS
    4. repec:ris:integr:0773 is not listed on IDEAS
    5. repec:eee:inecon:v:108:y:2017:i:c:p:260-273 is not listed on IDEAS
    6. Nocco, Antonella & Ottaviano, Gianmarco & Salto, Matteo, 2019. "Geography, Competition, and Optimal Multilateral Trade Policy," CEPR Discussion Papers 13584, C.E.P.R. Discussion Papers.
    7. Rishi R. Sharma, 2018. "Optimal tariffs with inframarginal exporters," Review of International Economics, Wiley Blackwell, vol. 26(4), pages 768-783, September.
    8. repec:bla:reviec:v:26:y:2018:i:5:p:1154-1177 is not listed on IDEAS
    9. repec:eee:inecon:v:120:y:2019:i:c:p:145-161 is not listed on IDEAS
    10. repec:bla:canjag:v:66:y:2018:i:1:p:5-25 is not listed on IDEAS
    11. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2019. "Geography, competition, and optimal multilateral trade policy," Journal of International Economics, Elsevier, vol. 120(C), pages 145-161.
    12. Timini, Jacopo & Conesa, Marina, 2019. "Chinese Exports and Non-Tariff Measures: Testing for Heterogeneous Effects at the Product Level," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 34(2), pages 327-345.

    More about this item

    Keywords

    heterogeneous firms; monopolistic competition; productivity; terms of trade; trade policy; variety;

    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

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