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Optimal trade policy with monopolistic competition and heterogeneous firms

Jan I. Haaland and Anthony Venables ()

No 10219, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: heterogeneous firms; monopolistic competition; productivity; terms of trade; trade policy; variety (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2014-10
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Related works:
Journal Article: Optimal trade policy with monopolistic competition and heterogeneous firms (2016) Downloads
Working Paper: Optimal Trade Policy With Monopolistic Competition and Heterogeneous Firms (2016) Downloads
Working Paper: Optimal trade policy with monopolistic competition and heterogeneous firms (2014) Downloads
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