Mobile Capital, Variable Elasticity of Substitution, and Trade Liberalization

Ching-mu Chen and Dao-Zhi Zeng ()

Journal of Economic Geography, 2018, vol. 18, issue 2, 461-494

Abstract: This article investigates the impact of trade liberalization on trade patterns, firm markups, and firm locations in a two-factor monopolistic competition model that features variable elasticity of substitution by a general additively separable utility. We find that, depending on the relative export hurdles, either direction of one-way trade may occur when trade opens up. Its direction determines the responses of firm-level markups and various home market effects to falling trade costs. Our results show that some important findings in the literature are robust only with particular classes of preferences. We provide a possible rationale for some well-known conflicting empirical facts.

Keywords: pro-competitive effect; choke price; one-way trade; firm-level markups; home market effect (search for similar items in EconPapers)
JEL-codes: D43 F12 F15 F21 R12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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