Complementarity and Increasing Returns in Intermediate Inputs: A Theoretical and Applied General-Equilibrium Analysis

Florencio Lopez- de-Silane, James Markusen and Thomas Rutherford ()
Authors registered in the RePEc Author Service: Florencio Lopez-de-Silanes ()

No 4179, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Conventional analysis in the trade-industrial-organization literature suggests that, when a country has some market power over an imported good, some small level of protection must be welfare improving. This is essentially a terms-of-trade argument that is reinforced if the imported goods are substitutes for domestic goods produced with increasing returns to scale, goods that are initially underproduced in free-trade equilibrium. This paper notes that this result may not hold when (1) the imports are intermediates used in a domestic increasing-returns industry, and/or (2) the intermediates are complements for domestic inputs produced with increasing returns. We then demonstrate such an outcome with respect to Mexican protection against imported auto parts using an applied general-equilibrium model of the North American auto industry.

Date: 1992-10
Note: ITI
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Published as "Complementarity and Increasing Returns in Intermediate Inputs" Journal of Development Economics, vol 45, 1994, pp 101-119

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