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The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust ry Revisited, 1979-1985

  • Kala Krishna
  • Kathleen Hogan
  • Phillip Swagel

We examine the sensitivity of simple calibration models of trade in imperfectly competitive industries to changes in model specification, as well as to changes in the calibration parameters. We find that not just the magnitude, but also the sign of the optimal trade policies is very sensitive to the change in model specification. Indeed, use of policies derived from the 'wrong' model can reduce welfare from the status quo. However, the welfare gains to be obtained from application of the 'correct' model remain limited. Calibration models nonetheless provide useful estimates of firm and market behavior over time, as well as disaggregated elasticities of demand. We conclude that careful empirical work is necessary to guide model selection. For the present, the case for activist trade policy on the basis of calibration models should not be made.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3118.

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Date of creation: Sep 1989
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Publication status: published as Empirical Studies of Strategic Trade Policyedited by Paul Krugman and Alasdair Smith University of Chicago Press; 1994
Handle: RePEc:nbr:nberwo:3118
Note: ITI IFM
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  1. Kala Krishna & Marie Thursby, 1988. "Optimal Policies with Strategic Distortions," NBER Working Papers 2527, National Bureau of Economic Research, Inc.
  2. Robert C. Feenstra & James A. Levinsohn, 1989. "Distance, Demand, and Oligopoly Pricing," NBER Working Papers 3076, National Bureau of Economic Research, Inc.
  3. Kala Krishna & Motoshige Itoh, 1986. "Content Protection and Oligopolistic Interactions," NBER Working Papers 1843, National Bureau of Economic Research, Inc.
  4. Richard E. Baldwin & Paul Krugman, 1986. "Market Access and International Competition: A Simulation Study of 16K Random Access Memories," NBER Working Papers 1936, National Bureau of Economic Research, Inc.
  5. de Melo, Jaime & Tarr, David, 1988. "Welfare costs of U.S. quotas on textiles, steel, and autos," Policy Research Working Paper Series 83, The World Bank.
  6. Feenstra, Robert C, 1988. "Quality Change under Trade Restraints in Japanese Autos," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 131-46, February.
  7. Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Interindustry Wage Differentials Justify Strategic Trade Policy?," NBER Chapters, in: Trade Policies for International Competitiveness, pages 85-124 National Bureau of Economic Research, Inc.
  8. J. David Richardson, 1988. "Empirical Research on Trade Liberalisation with Imperfect Competition: A Survey," OECD Economics Department Working Papers 58, OECD Publishing.
  9. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
  10. Kala Krishna, 1985. "Trade Restrictions as Facilitating Practices," NBER Working Papers 1546, National Bureau of Economic Research, Inc.
  11. 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.
  12. Robert Driskill & Stephen McCafferty, 1989. "Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations," NBER Chapters, in: Trade Policies for International Competitiveness, pages 125-144 National Bureau of Economic Research, Inc.
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