Working Paper: CEPR ID: DP15896
Authors: Cécile Gaubert; Oleg Itskhoki; Maximilian Vogler
Abstract: We use the granular model of international trade developed in Gaubert and Itskhoki (2021) to study the rationale and implications of three types of government interventions typically targeted at large individual firms - antitrust, trade and industrial policies. We find that in antitrust regulation, governments face an incentive to be overly lenient in accepting mergers of large domestic firms, which acts akin to beggar-thy-neighbor trade policy in sectors with strong comparative advantage. In trade policy, targeting large individual foreign exporters rather than entire sectors is desirable from the point of view of a national government. Doing so minimizes the pass-through of import tariffs into domestic consumer prices, placing a greater portion of the burden on foreign producers. Finally, we show that subsidizing `national champions' is generally suboptimal in closed economies as it leads to an excessive build-up of market power, but it may become unilaterally welfare improving in open economies. We contrast unilaterally optimal policies with the coordinated global optimal policy and emphasize the need for international policy cooperation in these domains.
Keywords: granular; comparative advantage; antitrust; import tariff; industrial policy
JEL Codes: F12; F13; L13; L40; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Antitrust policies (L49) | Mergers of large domestic firms (L22) |
| Mergers of large domestic firms (L22) | Market power (L11) |
| Market power (L11) | Consumer welfare (D69) |
| Trade policies targeting large foreign exporters (F13) | Minimization of passthrough of tariffs to domestic prices (F16) |
| Minimization of passthrough of tariffs to domestic prices (F16) | Benefit to domestic consumers (D19) |
| Industrial policies subsidizing national champions (O25) | Excessive market power in closed economies (D42) |
| Industrial policies subsidizing national champions (O25) | Welfare improvement in open economies (D69) |