The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust Ry Revisited, 1979-1985

38 Pages Posted: 18 Apr 2007 Last revised: 13 Jul 2010

See all articles by Kala Krishna

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Kathleen Hogan

affiliation not provided to SSRN

Phillip Swagel

University of Maryland - School of Public Policy; Milken Institute; AEI

Date Written: September 1989

Abstract

We examine the sensitivity of simple calibration models of trade in imperfectly competitive industries to changes in model specification, as well as to changes in the calibration parameters. We find that not just the magnitude, but also the sign of the optimal trade policies is very sensitive to the change in model specification. Indeed, use of policies derived from the 'wrong' model can reduce welfare from the status quo. However, the welfare gains to be obtained from application of the 'correct' model remain limited. Calibration models nonetheless provide useful estimates of firm and market behavior over time, as well as disaggregated elasticities of demand. We conclude that careful empirical work is necessary to guide model selection. For the present, the case for activist trade policy on the basis of calibration models should not be made.

Suggested Citation

Krishna, Kala and Hogan, Kathleen and Swagel, Phillip, The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust Ry Revisited, 1979-1985 (September 1989). NBER Working Paper No. w3118, Available at SSRN: https://ssrn.com/abstract=980435

Kala Krishna (Contact Author)

Pennsylvania State University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Kathleen Hogan

affiliation not provided to SSRN

No Address Available

Phillip Swagel

University of Maryland - School of Public Policy ( email )

College Park, MD 20742-1815
United States
(301) 405-1914 (Phone)

Milken Institute ( email )

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United States

AEI ( email )

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