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Trade, Growth and Increasing Returns to Infrastructure : The Role of the Sophisticated Monopolist

  • Ashok S Guha


  • Brishti Guha

We model an economy with two final goods, manufactures produced under IRS and food. The scale economies in manufacturing are external (therefore compatible with perfect competition) and traceable to internal economies in the provision of an infrastructural service (the third sector of the economy). We examine the equilibria of this economy under both autarky and free trade. We thus revisit a theme with a voluminous literature, beginning with R. C. O. Matthews(1950) vintage classic and including, among others, Panagariya (1991), Krugman (1991), and Venables (1996). Much of this as well as our own work concerns multiple equilibria : it overlaps the development literature on poverty traps from Rosenstein Rodan (1943) to Murphy, Schleifer and Vishny (1989). We differ from this body of work in a major, and some minor, respects. We trace the source of increasing returns to infrastructure, and our focus is on the role of the infrastructure providers beliefs in determining the equilibrium and the fate of the economy. Internal economies in infrastructure provision ensure that it is non-competitive . We consider a pure monopoly. The infrastructure provider is of course aware of the impact of his decisions on the price of his services, but he may or may not appreciate their impact, on demand for labor (in a market where he competes with all other industrial and agricultural producers) and wages and induced effects on demand for infrastructure itself. He may in short be a nave or a sophisticated decision-maker. We model the nave infrastructure provider after Venables (1996). Venables portrays a producer of intermediates who derives the demand curve for his product on the assumption that his customers have already contracted for their purchases of other inputs, specifically labor. Similar beliefs on the part of our infrastructure provider generate an equilibrium that is unique in the closed economy. In the small open economy, on the other hand, equilibria, where they exist , will generally be multiple : at any world price, there will generally exist one at a low level with unexhausted scale economies and another at a high level where these have been exhausted.

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Paper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 22432.

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Date of creation: Jan 2008
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Handle: RePEc:eab:tradew:22432
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  1. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
  2. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  3. Vince P. Crawford & Nagore Iriberri, 2005. "Fatal Attraction: Focality, Naivete, and Sophistication in Experimental Hide-and-Seek Games," Levine's Bibliography 666156000000000454, UCLA Department of Economics.
  4. Miguel A. Costa-Gomes & Vincent P. Crawford, 2006. "Cognition and Behavior in Two-Person Guessing Games: An Experimental Study," Levine's Bibliography 321307000000000336, UCLA Department of Economics.
  5. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
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  7. Ishikawa, Jota, 1992. "Trade patterns and gains from trade with an intermediate good produced under increasing returns to scale," Journal of International Economics, Elsevier, vol. 32(1-2), pages 57-81, February.
  8. Horst Herberg & Murray C. Kemp, 1969. "Some Implications of Variable Returns to Scale," Canadian Journal of Economics, Canadian Economics Association, vol. 2(3), pages 403-415, August.
  9. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  10. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  11. Panagariya, Arvind, 1981. "Variable Returns to Scale in Production and Patterns of Specialization," American Economic Review, American Economic Association, vol. 71(1), pages 221-30, March.
  12. Colin F. Camerer & Teck-Hua Ho & Juin-Kuan Chong, 2004. "A Cognitive Hierarchy Model of Games," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 861-898.
  13. Okuno-Fujiwara, Masahiro, 1988. "Interdependence of industries, coordination failure and strategic promotion of an industry," Journal of International Economics, Elsevier, vol. 25(1-2), pages 25-43, August.
  14. Toru Kikuchi & Tetsuro Ichikawa, 2002. "Congestible communications networks and international trade," International Advances in Economic Research, International Atlantic Economic Society, vol. 8(1), pages 81-81, February.
  15. Venables, Anthony J., 1996. "Trade policy, cumulative causation, and industrial development," Journal of Development Economics, Elsevier, vol. 49(1), pages 179-197, April.
  16. Rodriguez-Clare, Andres, 1996. "The division of labor and economic development," Journal of Development Economics, Elsevier, vol. 49(1), pages 3-32, April.
  17. Puga, Diego & Venables, Anthony J, 1999. "Agglomeration and Economic Development: Import Substitution vs. Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 109(455), pages 292-311, April.
  18. Toru Kikuchi & Tetsuro Ichikawa, 2002. "Congestible communications networks and international trade," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 331-340, May.
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