On Sunk Costs and Trade Liberalization in Applied General Equilibrium

We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are arti ̄cially boosted by an unrealistic treatment of ̄xed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way signi ̄cant enough to a®ect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise. Any views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.