Optimal trade policy with monopolistic competition and heterogeneous firms

Anthony Venables and Jan I. Haaland

No 10219, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper derives optimal trade and domestic taxes for a small open economy containing a monopolistically competitive (MC) sector in which firms may have heterogeneous productivity levels. Domestic protection brings gains from expanding the number of product varieties on offer, but these gains (and the corresponding rates of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign exporters who may withdraw from the market. Our analysis encompasses special cases in which the domestic MC sector can expand or contract flexibly, or is of fixed size. In the latter case gains from protection arise from terms of trade effects and, since various margins of substitution are switched off, only the relative values of domestic taxes, import tariffs and export taxes matter.

Keywords: Trade policy; Monopolistic competition; Heterogeneous firms; Terms of trade; Variety; Productivity (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Optimal trade policy with monopolistic competition and heterogeneous firms (2016)
Working Paper: Optimal Trade Policy With Monopolistic Competition and Heterogeneous Firms (2016)
Working Paper: Optimal trade policy with monopolistic competition and heterogeneous firms (2014)
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