Painful Birth of Trade Under Classical Monopolistic Competition

Igor Bykadorov, Andrea Ellero (), Stefania Funari, Sergey Kokovin and Pavel Molchanov ()

HSE Working papers from National Research University Higher School of Economics

Abstract: In the standard Krugman (1979) non-CES trade model, several asymmetric countries typically lose from increasing trade costs. However, all countries transiently benefit from such increase at the moment of closing trade, under almost-prohibitive trade costs (i.e., near autarky, which is possible only under non-CES preferences). In other words, during trade liberalization the first step from autarky to trade is necessarily harmful. Our explanation rests on market distortion and business destruction effects.

Keywords: Trade gains; monopolistic competition; variable elasticity of substitution; free trade; autarky. (search for similar items in EconPapers)
JEL-codes: D43 F12 L13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (4)

Published in WP BRP Series: Economics / EC, April 2016, pages 1-35

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