Working Paper: NBER ID: w11637
Authors: Paul R. Bergin; Reuven Glick
Abstract: This paper develops a two-country macro model with endogenous tradability to study features of international economic integration. Recent episodes of integration in Europe and North America suggest some surprising observations: while quantities of trade have increased significantly, especially along the extensive margin, price dispersion has not decreased and may even have increased. We propose a way of reconciling these price and quantity observations in a macroeconomic model where the decision of heterogeneous firms to trade internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by lowering various fixed costs of trade may have large effects on entry decisions at the extensive margin without having direct effects on price-setting decisions. Whether this entry raises or lowers overall price dispersion depends on the type of heterogeneity that distinguishes the new entrants from incumbent traders.
Keywords: International Economic Integration; Trade Volume; Price Dispersion; Heterogeneity; Trade Costs
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in per-unit trade costs (F12) | reduced price dispersion between countries (F12) |
| reductions in fixed trade costs (F12) | no effect on price-setting decisions (D41) |
| reductions in fixed trade costs (F12) | increased trade volume (F19) |
| introduction of new goods with higher per-unit costs (F12) | increased overall price dispersion (D49) |
| reduced fixed costs of trade (F12) | significant increases in trade volume (F10) |
| reductions in fixed costs of trade (F12) | no effect on price convergence (F69) |