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Commercial Policies in the Presence of Input-Output Linkages

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  • Jung, Benjamin
  • Kohler, Wilhelm

Abstract

How do input-output linkages modify countries' incentives to conduct commercial policies? We address this question in a version of the Melitz (2003) model where the production-side of the economy is enriched by input-output linkages. The bundle of intermediate inputs used in production in addition to labor is a composite good governed by the same CES aggregator as the final good. Cooperative policies correct for an input distortion generated by the fact that firms' markups translate into the price of the composite good. In the analysis of non-cooperative trade policy, the input distortion stemming from domestic markups counteracts the standard terms-of-trade externality, resulting in a lower optimal tariff and potentially an optimal import subsidy.

Suggested Citation

  • Jung, Benjamin & Kohler, Wilhelm, 2016. "Commercial Policies in the Presence of Input-Output Linkages," VfS Annual Conference 2016 (Augsburg): Demographic Change 145833, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc16:145833
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    References listed on IDEAS

    as
    1. Pol Antras & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," American Economic Review, American Economic Association, vol. 102(3), pages 412-416, May.
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    3. Lorenzo Caliendo & Robert C. Feenstra & John Romalis & Alan M. Taylor, 2015. "Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades," NBER Working Papers 21768, National Bureau of Economic Research, Inc.
    4. Michele Imbruno, 2014. "Trade Liberalization, Intermediate Inputs and Firm Efficiency: Direct versus Indirect Modes of Import," Discussion Papers 2014-02, University of Nottingham, GEP.
    5. Jung, Benjamin, 2015. "Allocational efficiency with heterogeneous firms: Disentangling love of variety and market power," Economics Letters, Elsevier, vol. 134(C), pages 141-143.
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    More about this item

    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
    • D60 - Microeconomics - - Welfare Economics - - - General

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