International arbitrage and the extensive margin of trade between rich and poor countries

Item Type Journal paper
Abstract We incorporate consumption indivisibilities into the Krugman (1980) model and show that an importer’s per capita income becomes a primary determinant of “export zeros”. Households in the rich North (poor South) are willing to pay high (low) prices for consumer goods; hence unconstrained monopoly pricing generates arbitrage opportunities for internationally traded products. Export zeros arise because some northern firms abstain from exporting to the South, to avoid international arbitrage. Rich countries benefit from a trade liberalization, while poor countries lose. These results hold also under more general preferences with both extensive and intensive consumption margins. We show that a standard calibrated trade model (that ignores arbitrage) generates predictions on relative prices that violate no-arbitrage constraints in many bilateral trade relations. This suggests that international arbitrage is potentially important.
Authors Föllmi, Reto; Hepenstrick, Christian & Zweimüller, Josef
Journal or Publication Title The review of economic studies : RES
Language English
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Economic Policy
Refereed Yes
Date 1 January 2018
Publisher Oxford Univ.
Place of Publication Oxford
Volume 85
Number 1
Page Range 475-510
ISSN 0034-6527
ISSN-Digital 1467-937X
Publisher DOI https://doi.org/10.1093/restud/rdx016
Official URL http://hdl.handle.net/10.1093/restud/rdx016
Depositing User Prof. Dr. Reto Föllmi
Date Deposited 09 Feb 2017 14:33
Last Modified 20 Jul 2022 17:30
URI: https://www.alexandria.unisg.ch/publications/250244

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Föllmi, Reto; Hepenstrick, Christian & Zweimüller, Josef (2018) International arbitrage and the extensive margin of trade between rich and poor countries. The review of economic studies : RES, 85 (1). 475-510. ISSN 0034-6527

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https://www.alexandria.unisg.ch/id/eprint/250244
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