This paper indicates that the consequences of regional trade agreements for the world trade system may be deceiving—an arrangement’s apparent virtue may constitute the source of its drawback. In a model where governments have political, as well as economic, motivations, I show that a free trade area induces its members to reduce protection against the non-members, and to do so sufficiently deep...

Temporary Shocks and Offshoring: The Role of External Economies and Firm Heterogeneity We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potentia...

I present a model of offshoring decisions with heterogeneous firms, random adjustment costs, and endogenous markups. The model proposes a tractable probabilistic framework that goes beyond the conventional view of self-selection of more productive firms into offshoring. By characterizing the offshoring decision as a lumpy investment decision subject to heterogeneous adjustment costs, the model ...

In the model where the choice of technology by firms endogenously determines productivity differences, we investigate the link between factor endowment and the productivity both in the firm and industry levels. We find among others that firms in capital-abundant countries tend to adopt new advanced technologies more in their production processes, but opening to international trade will equalize...

This paper analyzes the consequences of parallel trade on health care systems in a two-country model with a vertical distributor relationship. In particular, two cost-sharing systems — coinsurance and indemnity insurance — are compared with respect to changes in copayments and public health expenditure. Under both cost-sharing systems, parallel trade generates a price-decreasing competition eff...

A central result in the theoretical literature on strategic trade is the ‘rent-shifting hypothesis’, the idea that government’s can employ trade policy as a precommitment device to transfer profit from foreign to domestic firms. To our knowledge, however, the rent-shifting hypothesis remains untested empirically. This paper constructs a theory-based empirical test of rent-shifting behavior that...

A Simple Theory of Industry Location and Residence Choice This paper provides a simple theory of geographical mobility which simultaneously explains people’s choice of residences in space and the location of industry. Residences are chosen on the basis of the utility which mobile households obtain across locations. The spatial pattern of industry is determined by the location decision of a scar...

This paper considers a world of two symmetric countries with two factors and two sectors. Outputs of the two sectors are imperfect substitutes and sectors differ in relative factor intensity. Each sector contains a continuum of heterogenous firms that produce differentiated goods within their sector. Trade is costly and there are both variable and fixed costs of exporting. The paper shows that ...

Recent literature has argued that, contrary to the results of a seminal paper by Rose (2004), WTO membership does promote bilateral trade, at least for developed economies and if membership includes non-formal compliance. We review the literature in order to identify open issues. We then develop the simplest possible “corner-solutions" version of the gravity model which serves as a framework to...

We study the impact of transnational terrorism diffusion on security and trade. We set a simple theoretical model predicting that the closer a country to a source of terrorism, the higher the negative spillovers on its trade. The idea is that security measures, which impede trade, are directed both against the source country of terror and its neighbor countries where terrorism may diffuse. In c...