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VERs Under Imperfect Competition and Foreign Direct Investment: A Case Study of the US-Japan Auto VER

  • de Melo, Jaime
  • Tarr, David

This paper simulates the costs of the US-Japan auto VER. Under a standard constant returns to scale (CRTS) formulation, the costs are estimated at about $10 billion. It then sequentially introduces important features of the auto VER: endogenous rent premium determination, wage distortions in autos, the United States capturing some of the rents of the VER, US monopsony power in autos, increasing returns to scale, pure profits and entry, foreign direct investment, and endogenous conjectures. In the preferred monopolistic competition, initial profit model, the estimated costs are about 10% less than under the assumption of CRTS, but costs remain high at over $200,000 per job protected in autos. Compared with exogenous rent determination, endogenous rent determination results in significantly lower estimated costs of the VER because domestic entry reduces the rent premium. Foreign direct investment with initial profits is shown to lower the costs of the VER if, and only if, the rent premium is endogenous.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1173.

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Date of creation: May 1995
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Handle: RePEc:cpr:ceprdp:1173
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  1. Melo, J. de & Tarr, D., 1993. "Industrial Policy in the Presence of Wage Distorsions: The Case of the US Auto and Steel Industries," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 93.17, Institut d'Economie et Econométrie, Université de Genève.
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  6. Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
  7. de Melo, Jaime & Stanton, Julie & Tarr, David, 1989. "Revenue raising taxes : general equilibrium evaluation of alternative taxation in U.S. petroleum industries," Policy Research Working Paper Series 145, The World Bank.
  8. James Levinsohn, 1988. "Empirics of Taxes on Differentiated Products: The Case of Tariffs in the U.S. Automobile Industry," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 9-44 National Bureau of Economic Research, Inc.
  9. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
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  11. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-45, February.
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  19. repec:fth:geneec:93.06 is not listed on IDEAS
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  22. Dani Rodrik, 1988. "Imperfect Competition, Scale Economies, and Trade Policy in Developing Countries," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 109-144 National Bureau of Economic Research, Inc.
  23. Jaime De Melo & David Tarr, 2015. "Industrial Policy In The Presence Of Wage Distortions: The Case Of The Us Auto And Steel Industries," World Scientific Book Chapters, in: Modeling Developing Countries' Policies in General Equilibrium, chapter 23, pages 485-503 World Scientific Publishing Co. Pte. Ltd..
  24. William Novshek, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 473-486.
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