Pollution-intensive industries are generally characterized by imperfect competition, increasing returns to scale and large transportation costs. We investigate two countries, N and S, each with two sectors. Manufacturing generates cross-border pollution which reduces agricultural production. Firms can freely move across country borders, but not workers. First, we show that pollution lowers local income since it reduces agricultural production. This income-reduction effect discourages firms to move to the country with laxer environmental regulations that generate more pollution. Second, our analysis demonstrates that manufacturing agglomeration forces can alleviate the pollution haven effect. And a pollution haven may not arise, if environmental regulation is slightly more stringent in the larger country N than in the smaller country S. These results are strongly supported by recent empirical findings. In addition, the model predictions call for international cooperation of environmental policies, especially when trade becomes freer.

The paper embeds child labor in a standard two-sector general-equilibrium model of a small open economy facing perfectly competitive markets, efficiency wages, and free-trade. The modern sector produces a homogeneous good using skilled adult labor and capital, and offers effort-based efficiency wages. The agrarian (traditional) sector produces a homogeneous good using unskilled (child and adult) labor and skilled adult labor, and offers nutritional efficiency wages to child workers. Nutritional efficiency wages introduce wage stickiness and transform the economy into a dual one with unlimited supply of child labor. Trade policies that increase the output of the modern sector reduce the incidence of child labor and the dispersion of wages between adult skilled workers and unskilled workers. Emigration of skilled adult workers reduces the incidence of child labor, whereas emigration of unskilled adult workers has the opposite effect. Domestic subsidies that reduce the child wage increase the incidence of child labor; and a ban on child-labor benefits unskilled adult workers but hurts skilled adult workers.

This paper examines the relationship between resource development and industrialization. When transport costs are high, regions with more valuable natural resources offer higher welfare than other regions. However, when transport costs decrease, firms begin to move out of the region, resulting in the Dutch disease, initially in terms of industry shares, but eventually in terms of welfare too when transportation is sufficiently free. If resource goods are also used as manufacturing inputs as well as final goods, they can substitute for labor when wages rise, which tends to alleviate the Dutch disease by keeping production costs down. The model thus provides helpful insight for cities trying to develop efficiently their limited resources.

This paper examines the role of outside options in a downstream duopoly with exclusive vertical relations as in the Japanese automobile industry. In our setup, the downstream firms have outside options, and two upstream firms with exclusive relations can engage in cost reducing investments. More interestingly, each upstream firm can choose whether to voluntarily generate technology spillovers to its rival. We show that better outside options of the downstream firms can induce voluntary technology spillovers in the upstream level, increasing the profits of all firms on the vertical chain.

We consider a bilateral monopoly with a supplier and a buyer. Their trading terms are determined through negotiations, but affected by the buyer's efforts to search for outside suppliers. We find surprisingly that a market expansion may harm the supplier.