Working Paper: NBER ID: w21840
Authors: Jose Asturias; Sewon Hur; Timothy J. Kehoe; Kim J. Ruhl
Abstract: In what order should a developing country adopt policy reforms? Do some policies complement each other? Do others substitute for each other? To address these questions, we develop a two-country dynamic general equilibrium model with entry and exit of firms that are monopolistic competitors. The model includes barriers to entry of new firms, barriers to international trade, and barriers to contract enforcement. We find that the same reform can have very different effects on other economic outcomes, depending on the types of distortions present. In our model, we find that reforms to trade barriers and barriers to the entry of new firms are substitutable, as are reforms to contract enforcement and trade barriers. In contrast, we find that reforms to contract enforcement and the barriers to entry are complementary. Finally, the optimal sequence of reforms requires reforming trade barriers before contract enforcement.
Keywords: No keywords provided
JEL Codes: F13; F4; O11; O19; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reducing trade barriers (F13) | higher welfare gains (D69) |
| strengthening contract enforcement (K12) | higher welfare gains (D69) |
| reducing barriers to entry (D43) | higher welfare gains (D69) |
| reducing trade barriers (F13) | improves contract enforcement (D86) |
| improving contract enforcement (D86) | higher welfare gains (D69) |
| reducing trade barriers and barriers to entry are substitutable (F13) | diminishing marginal benefit of the other (D10) |
| improving contract enforcement and barriers to entry are complementary (D86) | enhancing effectiveness of the other (O36) |
| optimal sequence of reforms (P21) | higher welfare gains (D69) |