Backfiring Effect of Uncertain Trade Policy

Abstract

Constructing a stochastic international trade model where exporting firm faces uncertain trade policy expressed by geometric Brownian motion, we examine the effect of an increase in the trade policy uncertainty on the optimal start time of export. It is revealed that when the trade policy is less uncertain than a threshold level, an increase in the trade policy uncertainty accelerates the optimal exporting timing of export, which is in sharp contrast to the standard result that an increase in the uncertainty postpones the optimal timing. It is also revealed that such a stochastic version of the backfiring effect reduces the world welfare if demand for exported products is low, starting export is costly or future is not important.

Counter Cowbell Effect in a Stochastic Market: Does Subsidy Really Induce Foreign Direct Investment?

“…It was revealed that contrary to the intention of the government of the host country, the "cowbell" does not work, i.e., the investment-attracting subsidy does not induce foreign direct investment. We can say that this counter cowbell effect is a counterpart of the backfiring effect Fujita [13] showed.…”

“…More precisely, by incorporating demand and cost functions explicitly into the real option international trade model, we examine if the "cowbell" attracts foreign direct investment, i.e., if the investment-attracting subsidy really induces foreign direct investment. The most related work is Fujita [13] that showed the backfiring effect, which means that imposing a tariff can increase exports. We can say that the counter cowbell effect shown in the present paper is a counterpart of the backfiring effect revealed in Fujita [13].…”

“…The most related work is Fujita [13] that showed the backfiring effect, which means that imposing a tariff can increase exports. We can say that the counter cowbell effect shown in the present paper is a counterpart of the backfiring effect revealed in Fujita [13].…”

Luxury Goods vs Necessity Goods: Which Goods Contribute to Enhancement of the National Wealth?

“…revealed the importance of the value of waiting. More precisely, by incorporating utility and cost functions explicitly into the optimal stopping model, as in Fujita (2007), Fujita (2016) etc., we examine if the innovation accelerates the generation of luxury goods market, to enhance the national wealth.…”