Journal Article

Mobile Capital, Variable Elasticity of Substitution, and Trade Liberalization

Ching-mu Chen and Dao-Zhi Zeng

in Journal of Economic Geography

Volume 18, issue 2, pages 461-494
Published in print March 2018 | ISSN: 1468-2702
Published online August 2017 | e-ISSN: 1468-2710 | DOI: https://dx.doi.org/10.1093/jeg/lbx022
Mobile Capital, Variable Elasticity of Substitution, and Trade Liberalization

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  • Market Structure and Pricing
  • International Trade
  • International Factor Movements and International Business
  • Urban, Rural, and Regional Economics

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Abstract

This article investigates the impact of trade liberalization on trade patterns, firm markups, and firm locations in a two-factor monopolistic competition model that features variable elasticity of substitution by a general additively separable utility. We find that, depending on the relative export hurdles, either direction of one-way trade may occur when trade opens up. Its direction determines the responses of firm-level markups and various home market effects to falling trade costs. Our results show that some important findings in the literature are robust only with particular classes of preferences. We provide a possible rationale for some well-known conflicting empirical facts.

Keywords: pro-competitive effect; choke price; one-way trade; firm-level markups; home market effect; D43; F12; F15; F21; R12

Journal Article.  11477 words.  Illustrated.

Subjects: Market Structure and Pricing ; International Trade ; International Factor Movements and International Business ; Urban, Rural, and Regional Economics

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