Bad Trade: The Loss of Variety
We reconsider Krugman’s love-of-variety model of trade (Krugman, 1979). We show that initially, as trade costs fall below the prohibitive level, trade leaves everybody worse off. The reason is that, due to the envelope theorem, the gains from trade are second-order, while the utility losses associated with the disappearance of domestic varieties are first-order. This finding is robust. It applies to unilateral and coordinated reductions in trade cost or tariffs, and it extends to heterogeneous firms and arbitrary asymmetries between countries. Even if perfectly free and costless trade dominates autarky, a bit off trade is worse than either of the two.

Please sign up for meetings here: docs.google.com/spreadsheets/d/1uvCvkSKwY8S9Pq7Kk7MT1eG9tIdMA_JMseiQmWjTWqE/edit#gid=0
Date: 22 October 2019, 16:00 (Tuesday, 2nd week, Michaelmas 2019)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room B
Speaker: Felix Vardy (IMF)
Organising department: Department of Economics
Part of: International Trade Workshop
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Clark