EconPapers    
Economics at your fingertips  
 

International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries

Reto Foellmi (), Christian Hepenstrick () and Zweimüller Josef

Review of Economic Studies, 2018, vol. 85, issue 1, 475-510

Abstract: 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)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdx016 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: International arbitrage and the extensive margin of trade between rich and poor countries (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:1:p:475-510.

Access Statistics for this article

Review of Economic Studies is currently edited by Andrea Prat, Bruno Biais, Kjetil Storesletten and Enrique Sentana

More articles in Review of Economic Studies from Oxford University Press
Bibliographic data for series maintained by Oxford University Press ().

 
Page updated 2019-09-12
Handle: RePEc:oup:restud:v:85:y:2018:i:1:p:475-510.