Working Paper: CEPR ID: DP10219
Authors: Jan I. Haaland; Anthony J. Venables
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 canexpand 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
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade policy (F13) | welfare (I38) |
| domestic protectionism (F52) | welfare gains (D69) |
| domestic subsidies (H23) | number of domestic firms (F23) |
| number of domestic firms (F23) | consumer surplus (D46) |
| optimal tariffs (F13) | terms of trade (F14) |
| terms of trade (F14) | prices of domestic firms (L11) |
| prices of domestic firms (L11) | wage effect (J31) |
| firm heterogeneity (D21) | magnitude of optimal trade taxes (H21) |