Working Paper: NBER ID: w4816
Authors: Eric Hutton; John Whalley
Abstract: This paper argues that whether estimates of the welfare cost of natural or artificial trade barriers that do not discriminate by quality are subject to positive or negative specification bias when using models which do not explicitly recognize quality variation depends on the reference point used in counterfactual equilibrium analysis. We use numerical general equilibrium techniques to generate counter examples to the widely held view that (in the competitive case) incorporating quality upgrading will tend to reduce the welfare costs of quality invariant trade barriers. To do this, we use a trade-distorted equilibrium as the reference point, rather than free trade.
Keywords: Specification Bias; Quality Upgrading; Trade Barriers
JEL Codes: F13; D61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Omission of quality variation (L15) | Positive specification bias in welfare cost predictions (D60) |
| Trade-distorted equilibrium as reference point (D59) | Reversal of positive specification bias (C52) |
| Quality upgrading (L15) | Specification bias in conventional understanding of relative prices (D11) |
| Reference point (free trade vs trade-distorted equilibrium) (F14) | Measured welfare costs (D69) |