Working Paper: CEPR ID: DP1173
Authors: Jaime de Melo; David G. Tarr
Abstract: This paper simulates the costs of the US-Japan auto VER. Under a standard constant returns to scale (CRTS) formulation, the costs are estimated at about $10 billion. It then sequentially introduces important features of the auto VER: endogenous rent premium determination, wage distortions in autos, the United States capturing some of the rents of the VER, US monopsony power in autos, increasing returns to scale, pure profits and entry, foreign direct investment, and endogenous conjectures. In the preferred monopolistic competition, initial profit model, the estimated costs are about 10% less than under the assumption of CRTS, but costs remain high at over $200,000 per job protected in autos. Compared with exogenous rent determination, endogenous rent determination results in significantly lower estimated costs of the VER because domestic entry reduces the rent premium. Foreign direct investment with initial profits is shown to lower the costs of the VER if, and only if, the rent premium is endogenous.
Keywords: VER; imperfect competition; general equilibrium; foreign direct investment
JEL Codes: F12; F13; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S.-Japan voluntary export restraint (VER) (F14) | estimated costs of the VER (Q51) |
| constant returns to scale (CRTS) model (D24) | estimated costs of the VER (Q51) |
| increasing returns to scale (IRTS) (F12) | estimated costs of the VER (Q51) |
| domestic entry into the auto market (L62) | rent premium (R21) |
| rent premium (R21) | overall costs (J30) |
| foreign direct investment (FDI) (F23) | costs of the VER (Q51) |
| rent premium (endogenously treated) (R21) | costs of the VER (Q51) |
| domestic entry into the auto market (L62) | overall costs (J30) |