Working Paper: NBER ID: w7671
Authors: James E. Rauch; Vitor Trindade
Abstract: We model home country familiarity with business opportunities in a foreign country as a parameter in a matching process between domestic and foreign firms. We show that as familiarity increases the effect of relative national labor supplies on relative national wages declines, the elasticity of domestic labor demand increases, and the extent of pass-through' of trade tax changes to home wages increases. Since the volume of trade is increasing in familiarity, trade liberalization has a greater impact on wages when the initial volume of trade is greater, all else equal. As familiarity becomes complete, the results of the 2 x 2 Heckscher-Ohlin-Samuelson model are obtained: relative national wages are fixed by trade taxes independent of relative national labor supplies, domestic labor demand is infinitely elastic, and pass-through of tax changes to wages is complete' in the sense that it is determined entirely by production technology and no arbitrage opportunities remain.
Keywords: No keywords provided
JEL Codes: F15; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| home country familiarity with foreign business opportunities (F23) | effect of relative national labor supplies on relative national wages (F66) |
| home country familiarity with foreign business opportunities (F23) | elasticity of domestic labor demand (J29) |
| home country familiarity with foreign business opportunities (F23) | passthrough of trade tax changes to home wages (F16) |
| initial trade volumes (F10) | impact of trade liberalization on wages (F66) |
| complete familiarity (Y50) | wages fixed by trade taxes (F16) |