Integrability and Generalized Separability

Recent trade agreements have shifted their focus to non-tariff barriers such as regulations and product standards, which have been traditionally treated as pure domestic policies. The imposition of such standards reallocates production from small to large, high quality firms. We model regulations as a fixed cost that any firm selling to an economy must pay, consistent with stylized facts that we present. The fixed cost improves allocative efficiency, by reallocating production towards high-quality firms, who under-produce in the market allocation. Furthermore, the fixed cost generates a positive externality on the rest of the world as it induces entry of high-quality firms, but unilateral regulation lowers the terms of trade of the imposing country. The result justifies international cooperation based on the fact that such cooperation can improve welfare, rather than preventing negative consequences of tariff wars. We estimate our model and apply its gravity formulation to quantify the welfare consequences of imposing the optimal regulation, the extent of the positive externalities across countries, and the effects of cooperation.

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“…In particular, while Dixit and Stiglitz () formalized monopolistic competition when the direct utility is additive, generalized separability (Gorman ) can be analyzed similarly; Benassy () has considered monopolistic competition with homothetic preferences, and Bertoletti and Etro () with an indirect utility, which is additive . Bertoletti and Etro (, ) have put together these and more general preferences in a unique framework studying equilibrium and optimal market structures, and here I use their framework to study dynamic market structures (see also Arkolakis and Morlacco , Fally , Bertoletti and Etro , Dhingra and Morrow and Arkolakis et al, for other recent works generalizing the theory of monopolistic competition in static models).…”

Section: Introductionmentioning

confidence: 99%

Macroeconomics with Endogenous Markups and Optimal Taxation

Etro¹

2018

Southern Economic Journal

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I augment a flexible price dynamic general equilibrium model with any symmetric intratemporal preferences over a variety of goods supplied under monopolistic, Bertrand, or Cournot competition to derive implications for business cycle and market inefficiencies. Endogenous markups can magnify the impact of shocks on consumption and labor supply through intertemporal substitution mechanisms, and the optimal fiscal policy requires a variable labor income subsidy and a capital income tax that converges to zero in the long run. With an endogenous number of goods and strategic interactions, entry also affects markups and the optimal fiscal policy requires also a tax on profits. I characterize equilibrium and efficient market structures and derive optimal tax rules for a variety of preferences, including a new type of general additive preferences that nest direct, indirect, implicit, and homothetic additivity.

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“…In particular, while Dixit and Stiglitz (1977) formalized monopolistic competition when the direct utility is additive generalized separability (Gorman 1987) can be analyzed similarly; 2 Benassy (1997) has considered monopolistic competition with homothetic preferences, and Bertoletti and Etro (2017) with an indirect utility, which is additive. 3 Etro (2015, 2016) have put together these and more general preferences in a unique framework studying equilibrium and optimal market structures, and here I use their framework to study dynamic market structures (see also Arkolakis and Morlacco 2017, Fally 2018, Dhingra and Morrow 2019and Arkolakis et al, 2015 for other recent works generalizing the theory of monopolistic competition in static models).…”

Section: Introductionmentioning

confidence: 99%

Macroeconomics with Endogenous Markups and Optimal Taxation

Etro

¹

2016

SSRN Journal

0

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I augment a flexible price dynamic general equilibrium model with any symmetric intratemporal preferences over a variety of goods supplied under monopolistic, Bertrand, or Cournot competition to derive implications for business cycle and market inefficiencies. Endogenous markups can magnify the impact of shocks on consumption and labor supply through intertemporal substitution mechanisms, and the optimal fiscal policy requires a variable labor income subsidy and a capital income tax that converges to zero in the long run. With an endogenous number of goods and strategic interactions, entry also affects markups and the optimal fiscal policy requires also a tax on profits. I characterize equilibrium and efficient market structures and derive optimal tax rules for a variety of preferences, including a new type of general additive preferences that nest direct, indirect, implicit, and homothetic additivity.

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Integrability and Generalized Separability

Cited by 11 publications

References 20 publications

Quality Misallocation, Trade, and Regulations

Quality Misallocation, Trade, and Regulations

Macroeconomics with Endogenous Markups and Optimal Taxation

Macroeconomics with Endogenous Markups and Optimal Taxation

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