Trade Costs and Strategic Investment in Infrastructure in a Dynamic Global Economy with Symmetric Countries

Akihiko Yanase (), Ngo Van Long and Ngo Van Long
Authors registered in the RePEc Author Service: Ngo Van Long

No 8707, CESifo Working Paper Series from CESifo

Abstract: This paper develops a two-country model of intraindustry trade with trade costs, which can be reduced by public investment in an international infrastructure capital, the stock of which accumulates over time. Depending on the trade costs and international distribution of manufac-turing firms, equilibrium patterns of trade are determined, and national welfare in each country is affected by these trade patterns. Taking the relationship between trade costs and national welfare into consideration, the governments carry out a dynamic game of public investment. We show that the dynamic equilibrium of the policy game may exhibit history dependency; if the initial stock of international infrastructure is smaller (larger) than a certain level, the infrastructure stock decreases (increases) over time, and the world economy will end up in autarky (two-way free trade) in the long-run. We also show that international cooperation is beneficial in the sense that it may enable the world economy to escape from a “low development trap.”

Keywords: public infrastructure capital; intraindustry trade; differential game; multiple equilibria. (search for similar items in EconPapers)
JEL-codes: C61 C73 F12 H54 H87 O18 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-gth and nep-opm
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Working Paper: Trade Costs and Strategic Investment in Infrastructure in a Dynamic Global Economy with Symmetric Countries (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8707

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