International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries
Reto Foellmi (),
Christian Hepenstrick () and
Review of Economic Studies, 2018, vol. 85, issue 1, 475-510
We incorporate consumption indivisibilities into the Krugman (1980) model and show that an importer's per capita income becomes a primary determinant of “export zeros”. Households in the rich North (poor South) are willing to pay high (low) prices for consumer goods; hence, unconstrained monopoly pricing generates arbitrage opportunities for internationally traded products. Export zeros arise because some northern firms abstain from exporting to the South, to avoid international arbitrage. Rich countries benefit from a trade liberalization, while poor countries lose. These results hold also under more general preferences with both extensive and intensive consumption margins. We show that a standard calibrated trade model (that ignores arbitrage) generates predictions on relative prices that violate no-arbitrage constraints in many bilateral trade relations. This suggests that international arbitrage is potentially important.
Keywords: Non-homothetic preferences; Parallel imports; Arbitrage; Extensive margin; Export zeros; F10; F12; F19 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:1:p:475-510.
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