Distorted Trade Barriers
Since firm heterogeneity has been introduced into international trade models, the importance of firm entry and exit (the extensive margin) has been highlighted. In fact, Chaney (2008) illustrates how accounting for this extensive margin and heterogenous firms alters the standard gravity equation; thereby reversing the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Furthermore, Cole (forthcoming) points out that ad valorem tariffs affect the extensive margin quite differently than the commonly used iceberg transport cost. In this paper, I show that the elasticity of trade flows with respect to tariffs is more elastic than that of iceberg transport costs. Thus, elasticity estimates derived from variables such as distance may underestimate the effect caused by a change in tariffs.
|Date of creation:||Feb 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +353-1-283 0068
Web page: http://www.ucd.ie/economics
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ucn:wpaper:201105. 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: (Nicolas Clifton)
If references are entirely missing, you can add them using this form.