Department of Economics, UCSD UC San Diego

Department of Economics, UCSD UC San Diego

Title: Overcoming Informational Barriers to International Resource Allocation: Prices and Ties Author: Rauch, J E Casella, Alessandra, Columbia Publication Date: 12-01-2001 Publication Info: Department of Economics, UCSD, UC San Diego Permalink: http://escholarship.org/uc/item/2k8626fr Keywords: international economics, prices, domestic wages Abstract: Incomplete information in the international market creates difficulty in matching agents with productive opportunities and interferes with the ability of prices to allocate scarce resources across countries. Ties through international information-sharing networks or parent-subsidiary relationships overcome this matching friciton. When the difference between country factorendowment ratios is small relative to the share of agents that is tied, efficient arbitrage and the standard properties of neoclassical trade models prevail. When the difference between factorendowment ratios is sufficiently large, this equilibrium breaks down and countries become partially insulated from each other in the sense that the price (wage) of each country's immobile resource is more sensitive to changes in domestic than foreign supply and trade liberalization causes less convergence in relative resource prices. The model is applied to the debate over the impact of international trade on domestic wages, and extended to address whether ties can reduce world welfare through trade diversion and to compare the effect of ties on trade in differentiated versus homogenous products.

eScholarship provides open access, scholarly publishing services to the University of California and delivers a dynamic research platform to scholars worldwide.

2001-18

UNIVERSITY OF CALIFORNIA, SAN DIEGO DEPARTMENT OF ECONOMICS OVERCOMING INFORMATIONAL BARRIERS TO INTERNATIONAL RESOURCE ALLOCATION: PRICES AND TIES BY JAMES E. RAUCH AND ALESSANDRA CASELLA

DISCUSSION PAPER 2001-18 NOVEMBER 2001

29(5&20,1*,1)250$7,21$/%$55,(56 72,17(51$7,21$/5(6285&($//2&$7,2135,&(6$1'7,(6 -DPHV(5DXFK 'HSDUWPHQWRI(FRQRPLFV 8QLYHUVLW\RI&DOLIRUQLD6DQ'LHJR /D-ROOD&$ $OHVVDQGUD&DVHOOD 'HSDUWPHQWRI(FRQRPLFV &ROXPELD8QLYHUVLW\ 1HZ'@RQWKHFLUFOH:HUHSUHVHQWLQ)LJXUHWKHSRVVLELOLWLHVVHWWKDWUHVXOWV IURPDSRWHQWLDOLQWHUQDWLRQDOSDUWQHUVKLS$QLQWHUQDWLRQDOPDWFKLVDFFHSWDEOHLIWKHWKUHDWSRLQW LVQRWRXWVLGHWKH3DUHWRIURQWLHUWKHFDVHVKRZQLQ)LJXUH )RUV\PPHWU\ZLWKGRPHVWLF SDUWQHUVKLSVZHDSSO\WKH1DVKEDUJDLQLQJVROXWLRQWRWKHGLYLVLRQRIWKHVXUSOXVIURP LQWHUQDWLRQDOSDUWQHUVKLSV\LHOGLQJWKHQHW SURILWVWRWKHKRPHDQGIRUHLJQSURGXFHUVGHSLFWHGLQ )LJXUH 7KHFRQGLWLRQWKDWWKHWKUHDWSRLQWLVQRWRXWVLGHWKH3DUHWRIURQWLHUFDQEHH[SUHVVHGDV Z '# Z '>W @] Z RUDOWHUQDWLYHO\DV ]$' '>W @



ZKHUH Z 'Z / Z ' Z DQG N!7KLVFXWRIIFRQGLWLRQLVUHSUHVHQWHGLQ)LJXUH1RWH WKDWZHFDQZULWH DVDIXQFWLRQRIRQO\WKHUDWLRRIZDJHVEHFDXVH LVDFRQVWDQWHODVWLFLW\ IXQFWLRQ,QZKDWIROORZVZHZLOOORRVHO\VSHDNRIWKHIXQFWLRQ DVWKH³ZDJHUDWLR´ZKLFK VKRXOGQRWFDXVHDQ\FRQIXVLRQEHFDXVHLWLVMXVWDVFDOLQJRIWKHZDJHUDWLR1RWHWKDWWKH VPDOOHULVWKHZDJHUDWLRWKHPRUHOLNHO\LVDQLQWHUQDWLRQDOPDWFKWREHRIDFFHSWDEOHTXDOLW\ UHIOHFWLQJWKHJUHDWHUJDLQVIURPLQWHUQDWLRQDOWUDGH 7KHNH\IHDWXUHRIRXUVHDUFKDQGEDUJDLQLQJPRGHOLVWKDWVRPHKRPHSURGXFHUVGUDZ IRUHLJQSURGXFHUVWKDW\LHOGPDWFKTXDOLW\]' '>W @DQGWKHQUHWXUQKRPHZLWKERWK 

(TXDOGLYLVLRQRIWKHVXUSOXVIURPLQWHUQDWLRQDOSDUWQHUVKLSVLVXVHGRQO\LQ3URSRVLWLRQDQGVXEVHFWLRQ,9%

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

,,,%DVLF5HVXOWV :HEHJLQZLWKDGHILQLWLRQ 'HILQLWLRQ$&RPSOHWH,QIRUPDWLRQ(TXLYDOHQW (TXLOLEULXP&,( LVRQHLQZKLFKDOO SURGXFHUVPDWFKZLWKWKHLUSHUIHFWFRPSOHPHQWV 'HILQLWLRQLPSOLHVWKDWLQD&,(] 'IRUHYHU\FRQILUPHGPDWFK:HLQFOXGHWKHTXDOLILHU ³HTXLYDOHQW´LQWKHGHILQLWLRQRID&,(EHFDXVHLQIDFWFRPSOHWHLQIRUPDWLRQGRHVQRWH[LVWLQ RXUPRGHORIWKHZRUOGHFRQRP\ :HQRZHVWDEOLVKDSUHOLPLQDU\UHVXOW 3URSRVLWLRQ$&,(REWDLQVLIDQGRQO\LI $W3URRI:HVHHWKDWLI $WZHKDYHWKH 

&OHDUO\VRPHRIWKHVHILUPVDWWHPSWHGWKHIRUHLJQPDUNHW6ZHGLVK7UDGH&RXQFLOH[SRUWFRQVXOWDQW.HQW *ROGPDQQTXRWHGLQ1RWKGXUIWS VWDWHGRIKLVFOLHQWVWKDWDUHPDUJLQDORUIDLOHGH[SRUWHUV³6RPHWLPHV WKHLUSURGXFWLVQ WULJKWIRUWKHPDUNHWRUWKHFRXQWU\WKH\FKRVHZDVQRWDJRRGILWRUWKHLUDSSURDFKRUDJHQWVDUH QRWULJKW´ 

:K\VKRXOGWKHPDUJLQDOFRVWRIVHDUFKEHLQFUHDVLQJ",QRUGHUWRMXGJHWKHTXDOLW\RIDPDWFKZLWKDIRUHLJQ SURGXFHUDPDQDJHUPXVWEHLQWLPDWHO\IDPLOLDUZLWKKLVRZQILUP¶VRSHUDWLRQVDQGWKXVLQYROYHGLQWKHP,IKH WUDYHOVDEURDGIRUDZHHNVD\VRPHRQHFDQFRYHUIRUKLPEXWWKHORQJHUKHLVDEVHQWWKHPRUHFUXFLDODQGSUHVVLQJ DUHWKHXQPDGHGHFLVLRQVWKDWSLOHXS,QRWKHUZRUGVWKHRSSRUWXQLW\FRVWRIWKHPDQDJHU¶VWLPHLVLQFUHDVLQJ

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

 - P

  - W + y  -p ‡ Z = /    - W 



$VH[SHFWHGKRPHODERUGHPDQGLVLQFUHDVLQJLQ DVWKHZDJHUDWLRLQFUHDVHVWKHVKDUHRI LQWHUQDWLRQDOPDWFKHVWKDWDUHDFFHSWDEOHIDOOV 8VLQJWKHVDPHUHDVRQLQJZHFDQVKRZWKDWWKHGHPDQGIRUIRUHLJQODERUE\IRUHLJQ SURGXFHUVZKRVHLQWHUQDWLRQDOPDWFKHVZHUHXQVXFFHVVIXOLVJLYHQE\WKHOHIWKDQGVLGHRI HTXDWLRQ UHSODFLQJZZLWKZ 7RWKLVPXVWEHDGGHGWKHGHPDQGIRUIRUHLJQODERUE\WLHG SURGXFHUVDQGWKHGHPDQGJHQHUDWHGE\VXFFHVVIXOSDUWQHUVKLSVEHWZHHQXQWLHGKRPHDQGIRUHLJQ SURGXFHUV7KLVODVWVRXUFHRIGHPDQGFDQEHFRPSXWHGXVLQJHTXDWLRQV DQG 

  - P  I 

 

   > - W + y @  ]  p  Z

G] =   P ‡ y   -  - W   -p ‡ Z  

- + -

 W

  W





 ZKHUHZHXVHGWKHV\PPHWU\RIWKHSUREOHPWRLQWHJUDWHRYHURQO\KDOIWKHLQWHUYDOLQ)LJXUH DQGPXOWLSOLHGE\6XPPLQJWKHWKUHHVRXUFHVRIIRUHLJQODERUGHPDQGDQGHTXDWLQJWKHUHVXOW WRWKHIRUHLJQODERUHQGRZPHQW\LHOGVWKHIRUHLJQODERUPDUNHWFOHDULQJFRQGLWLRQ

  + P +  - P > - W - y @  -p ‡ Z = /   - W    







)RUHLJQODERUGHPDQGLVGHFUHDVLQJLQWKHZDJHUDWLR DVH[SHFWHG &RPELQLQJHTXDWLRQV DQG \LHOGVDIWHUDOLWWOHPDQLSXODWLRQ

 + >y  - W @ J y = / /  > + P  - P @ +  - >y  - W @



*LYHQWKHSURSHUWLHVRIJZHNQRZWKHOHIWKDQGVLGHRIHTXDWLRQ LVLQFUHDVLQJLQ :HWKHQ FODLPWKDWHTXDWLRQ GHILQHVWKHYDOXHRI/'/ EHORZZKLFKDQ,$(PXVWREWDLQ /'/ />P 'P @JW 



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



$QDOWHUQDWLYHGHULYDWLRQRIHTXDWLRQ KHOSVWREXLOGLQWXLWLRQ/HWXVDVVXPH  W7KHVPDOOHVWSRVVLEOH UDWLRRIKRPHWRIRUHLJQODERUGHPDQGVFRQVLVWHQWZLWKWKLVDVVXPSWLRQLVFRQVWUXFWHGE\KDYLQJDOOWLHGSURGXFHUV GHPDQGIRUHLJQODERUVLQFHZHFDQQRWKDYHDSRVLWLYHPHDVXUHRIFRQILUPHGLQWHUQDWLRQDOSDUWQHUVKLSVEHWZHHQ XQWLHGSURGXFHUV7KHGHPDQGIRUKRPHODERULVWKHQJLYHQE\>P '@ NZ DQGWKHGHPDQGIRUIRUHLJQODERULV JLYHQE\>P '@ NZ P' NZ  >P '@ NZ 'LYLGLQJKRPHE\IRUHLJQODERUGHPDQGDQG VXEVWLWXWLQJLQ  W\LHOGVWKHULJKWKDQGVLGHRIHTXDWLRQ 

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



7KHDVVXPSWLRQWKDW Z LVDFRQVWDQWHODVWLFLW\IXQFWLRQLVQRWQHFHVVDU\WRSURYHH[LVWHQFHRUXQLTXHQHVVEXWLV XVHGWRVDYHVSDFH8QLTXHQHVVFDQEHSURYHGZLWKRXWDGGLQJWRWKHVWDQGDUGSURSHUWLHVRIDSURILWIXQFWLRQE\ XVLQJDQDSSURSULDWHDGDSWDWLRQRI)LJXUHLQ5DXFKDQG&DVHOOD 7RGHPRQVWUDWHH[LVWHQFHLWLVVXIILFLHQW IRUWKHSURILWIXQFWLRQWRKDYHEHHQGHULYHGIURPDQXQGHUO\LQJSURGXFWLRQIXQFWLRQHTXDWLRQ WKDWVDWLVILHVWKH ,QDGDFRQGLWLRQV

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î+HFNVFKHU2KOLQ6DPXHOVRQPRGHO)LUVWWLHV DUHLUUHOHYDQWLQWKHVHQVHWKDWDFKDQJHLQPOHDYHVWKHHTXLOLEULXPXQFKDQJHG6HFRQGWKH UDWLRRIWKHIRUHLJQWRWKHKRPHZDJHLVIL[HGE\WKHFRQYHQWLRQDOWUDGHEDUULHUWKHWD[WUDQVSRUW FRVW DQGWKHXQGHUO\LQJSURGXFWLRQWHFKQRORJ\$VDFRQVHTXHQFHUHODWLYHFRXQWU\ZDJHVDUH LQGHSHQGHQWRIFRXQWU\ODERUHQGRZPHQWVDFKDQJHLQWKHODERUHQGRZPHQWRIHLWKHUFRXQWU\ FDXVHVZDJHVLQERWKFRXQWULHVWRFKDQJHE\DQHTXDOSHUFHQWDJHDQGPLJUDWLRQIURPWKHORZ



$OWKRXJKWLHVDUHHIIHFWLYHO\LQYLVLEOHLQD3$(WKH\XQGHUSLQWKHVPRRWKIXQFWLRQLQJRIWKHHFRQRP\SHUIRUPLQJ WKHUROHFODLPHGIRUWKHPE\VRFLRORJLVWVVXFKDV*UDQRYHWWHU 

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¶VODERUVXSSO\XQOLNHLQD3$($QRWKHU FRQVHTXHQFHRI3URSRVLWLRQLVWKDWPLJUDWLRQIURPWKHORZZDJHODERUDEXQGDQWFRXQWU\WRWKH 

)ROORZLQJ/HDPHU ZHFDQFDOOWKLVSURSHUW\³UHODWLYHIDFWRUSULFHLQVHQVLWLYLW\´

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³GHOLQNV´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î+HFNVFKHU2KOLQ6DPXHOVRQPRGHO,WLVWKXVLQVWUXFWLYHWRFRPSDUHWKHSURSHUWLHVRI WKHFRPSOHWHVSHFLDOL]DWLRQHTXLOLEULXPZLWKWKRVHRIWKH,PSHUIHFW$UELWUDJH(TXLOLEULXP2QH 

7KLVLQWXLWLRQLVVXIILFLHQWO\UREXVWWKDWZHFRQMHFWXUHWKDW3URSRVLWLRQVDQGZRXOGKROGIRUDQ\PRGHORI VHDUFKE\XQWLHGSURGXFHUVIRUIRUHLJQSDUWQHUVLQZKLFKWKHPDUJLQDOFRVWRIVHDUFKLVLQFUHDVLQJ

 NH\GLIIHUHQFHLVWKDWLQWKHFRPSOHWHVSHFLDOL]DWLRQHTXLOLEULXPDFKDQJHLQRQHFRXQWU\¶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

 $ %   GZ  =  (  GP   & '  GZ   ) 

ZKHUHWKHPDWUL[FRHIILFLHQWVDUHIXQFWLRQVRIZZ DQGWKHSDUDPHWHUVRIWKHPRGHO7KHQD VWUDLJKWIRUZDUGXVHRI&UDPHU¶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

,9'LVFXVVLRQDQG([WHQVLRQV $7KHLPSDFWRILQWHUQDWLRQDOWUDGHRQZDJHV0DUJLQVYHUVXVYROXPHV 6KRXOGWKHLPSDFWRILQWHUQDWLRQDOWUDGHRQZDJHVEHPHDVXUHGE\FRPSXWLQJWKHYROXPH RIWUDGHLQIDFWRUVHUYLFHVRUE\H[DPLQLQJFRVWFRPSHWLWLRQDWWKHPDUJLQ")UHHPDQSS  HOHJDQWO\VXPPDUL]HVWKHGHEDWH ,IWKH:HVWFDQLPSRUWFKLOGUHQ¶VWR\VSURGXFHGE\ORZSDLG&KLQHVHZRUNHUVDW EDUJDLQEDVHPHQWSULFHVVXUHO\ORZVNLOOHGZHVWHUQHUVZKRSURGXFHWKRVHWR\VDW ZDJHVWLPHVWKRVHRIWKH&KLQHVHZLOOIDFHDGLIILFXOWWLPHLQWKHMREPDUNHW ,WLVQ¶WHYHQQHFHVVDU\WKDWWKH:HVWLPSRUWWKHWR\V7KHWKUHDWWRLPSRUWWKHPRU WRPRYHSODQWVWROHVVGHYHORSHGFRXQWULHVWRSURGXFHWKHWR\VPD\VXIILFHWR IRUFHORZVNLOOHGZHVWHUQHUVWRWDNHDFXWLQSD\WRPDLQWDLQHPSOR\PHQW,QWKLV VLWXDWLRQWKHRSHQHFRQRP\FDQFDXVHORZHUSD\IRUORZVNLOOHGZRUNHUVHYHQ ZLWKRXWWUDGHWRVDYHP\MRE,DFFHSW&KLQHVHOHYHOSD\DQGWKDWSUHYHQWV LPSRUWV7KHLQYLVLEOHKDQGZRXOGKDYHGRQHLWVMREZLWKSURSHULQYLVLELOLW\ 

7KH(FRQRPLVW,QWHOOLJHQFH8QLWUHSRUWVWKHIROORZLQJSRSXODWLRQDQGPDUNHWFDSLWDOL]DWLRQVKDUHVUHVSHFWLYHO\ IRUWKH2YHUVHDV&KLQHVHLQ6RXWKHDVW$VLD,QGRQHVLDDQGSHUFHQWWKH3KLOLSSLQHVDQGSHUFHQW DQG7KDLODQGDQGSHUFHQW.OXWK 

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¶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



:HPLJKWWDNHWKHOLEHUW\RIFODULI\LQJ)UHHPDQ¶VVWDWHPHQWWRDGGWKDWWKHEDE\ERRPDIIHFWHGWKHSD\RI\RXQJ ZRUNHUVPRUHLQWKH8QLWHG6WDWHVWKDQLQ&KLQDDQGWKHUHODWLYHQXPEHURIFROOHJHJUDGXDWHVLQWKH8QLWHG6WDWHV DOWHUHGWKHSUHPLXPSDLGIRUHGXFDWLRQPRUHLQWKH8QLWHG6WDWHVWKDQLQ&KLQD

 DQLQFLSLHQWULVHLQWKHKRPHZDJHUHTXLUHVWKDWXQWLHGKRPHSURGXFHUVVKLIWIURPPDWFKLQJLQD FRPSOHWHLQIRUPDWLRQHQYLURQPHQWGRPHVWLFDOO\WRDQLQFRPSOHWHLQIRUPDWLRQHQYLURQPHQW DEURDG0DUJLQVQRZRSHUDWHLPSHUIHFWO\DQGUHODWLYHODERUGHPDQGLVQRORQJHULQILQLWHO\ HODVWLFZLWKUHVSHFWWRUHODWLYHFRXQWU\ZDJHVWKH³UHOHYDQWHODVWLFLW\´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³7KHSUHIHUHQFHRI

 .RUHDQILUPVIRULQYHVWPHQWLQ/DWLQ$PHULFD*XDWHPDOD+RQGXUDVWKH'RPLQLFDQ5HSXEOLF HWF LVVWLPXODWHGE\LWVSUR[LPLW\WRWKH86PDUNHWDQGHDV\TXRWDDFFHVV7KHSXOORI$VLDQ QDWLRQVVXFKDV,QGRQHVLD6UL/DQNDDQG%DQJODGHVKFRPHVPDLQO\IURPWKHLUZDJHUDWHVZKLFK DUHDPRQJWKHORZHVWLQWKHZRUOG´,QFRQWUDVW7DLZDQHVHILUPVLQYHVWHGPRVWKHDYLO\LQ&KLQD 0DOD\VLDWKH3KLOLSSLQHVDQG7KDLODQGDVZHOODV,QGRQHVLD(WKQLF&KLQHVHWLHVDUHLPSRUWDQW LQDOORIWKHVHFRXQWULHVDQGLQDWOHDVWWZR0DOD\VLDDQG7KDLODQG ZDJHVDUHZHOODERYH6RXWK $VLDQOHYHOV*HUHIILFRQFOXGHVS ³VRFLDOWLHVVKDSHVRXUFLQJQHWZRUNV´ 7RFUHDWHDVLWXDWLRQLQRXUPRGHOLQZKLFKSULFHVLJQDOVDQGWLHVFDQDFWDWFURVV SXUSRVHVZHDGGDWKLUGFRXQWU\ZLWKDJUHDWHUODERUSURGXFHUHQGRZPHQWUDWLRWKDQHLWKHURIWKH RWKHUWZRFRXQWULHV:HUHODEHOWKHKRPHFRXQWU\DVFRXQWU\DQGWKHIRUHLJQFRXQWU\DV FRXQWU\DQGODEHOWKHQHZFRXQWU\DVFRXQWU\)RUFRXQWU\WKHUHLVDFRQWLQXXPRI SURGXFHUVRIHYHU\W\SHRIPDVVVRWKDWWKHWRWDOPDVVRISURGXFHUVLQFRXQWU\HTXDOVWKHVXP RIWKHPDVVHVRISURGXFHUVLQFRXQWULHVDQG:HDVVXPHWKDWSURGXFHUVLQFRXQWU\VHDUFK DEURDGIRUSDUWQHUVILUVWIROORZHGE\SURGXFHUVLQFRXQWU\$VEHIRUHSURGXFHUVZKRIRUP XQVXFFHVVIXOLQWHUQDWLRQDOSDUWQHUVKLSVPXVWUHWXUQKRPHDQGPDWFKGRPHVWLFDOO\DQGODERU PDUNHWVFOHDUDIWHUDOOODERUGHPDQGVIURPLQWHUQDWLRQDODQGGRPHVWLFSDUWQHUVKLSVDUHUHFHLYHG :HZLOOLQYHVWLJDWHWKHLPSDFWRIWLHVRQZRUOGZHOIDUHUHODWLYHWRDEDVHOLQHVROXWLRQRI WKLVWKUHHFRXQWU\PRGHO,QWKHEDVHOLQHVROXWLRQWKHUHDUHQRWLHVDQGWLVWKHVDPHEHWZHHQDOO WKUHHSDLUVRIFRXQWULHV:HIXUWKHUDVVXPHWKDWWLVDSXUHPHOWLQJWUDQVSRUWFRVWVRWKDWZHGR QRWKDYHWRNHHSWUDFNRIWD[UHYHQXHV,WLVHDV\WRVKRZWKDWJLYHQDSSURSULDWHODERU



:HFRXOGWKXVDOORZDQ\XQPDWFKHGSURGXFHUVLQFRXQWU\WRVHDUFKDEURDGIRUSDUWQHUVDVZHOOEXWLWZRXOGQRW PDWWHUEHFDXVHDOOSDUWQHUVZRXOGDOUHDG\KDYHEHHQWDNHQ

 HQGRZPHQWVDQ,$(H[LVWVLQZKLFKFRXQWU\KDVWKHKLJKHVWDQGFRXQWU\WKHORZHVWZDJH,Q WKLVHTXLOLEULXPZHFDQWKLQNRIFRXQWU\SURGXFHUVDVPDWFKLQJZLWKWKHERWWRPKDOIRIWKH F\OLQGHURIFRXQWU\SURGXFHUVDQGFRXQWU\SURGXFHUVDVPDWFKLQJZLWKWKHUHPDLQGHURI FRXQWU\SURGXFHUV,WLVHDVLO\VKRZQWKDWWKHH[SHFWHGSURILWRIFRXQWU\SURGXFHUVLV GHFUHDVLQJLQWKHZDJHSUHYDLOLQJLQWKHSDUWQHU¶VFRXQWU\VRWKDWWKHFKRLFHRIDOOFRXQWU\ SURGXFHUVWRVHHNSDUWQHUVLQFRXQWU\UDWKHUWKDQFRXQWU\LVHTXLOLEULXPEHKDYLRU 6WDUWLQJIURPWKLVEDVHZHH[SORUHWKHLPSDFWRQZRUOGZHOIDUHRIWLHVEHWZHHQD SURSRUWLRQPRIFRXQWU\DQGFRXQWU\SURGXFHUV:KHQGHFLGLQJLQZKLFKFRXQWU\WRVHDUFK IRUDSDUWQHUWLHGFRXQWU\SURGXFHUVQRZIDFHDWUDGHRIIEHWZHHQDJXDUDQWHHRIPD[LPXP PDWFKTXDOLW\LQFRXQWU\DQGDJXDUDQWHHRIWKHORZHVWZDJHLQFRXQWU\7KH\FKRRVHWRXVH WKHLUWLHVZKHQWKHIROORZLQJLQHTXDOLW\KROGV

p Z > - W  ] - p  Z + @  - W + y p  Z  - W p  Z + p  Z   +  - +y G] <  - W    



I





 









 W



  W

 

ZKHUHZ GHQRWHVWKHZDJHLQFRXQWU\LDQG L



/ Z ' Z 2QWKHULJKWKDQGVLGHRI ZH

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³WUDGHGLYHUVLRQHIIHFW´DSSURDFKHV]HUR ZKLOHWKHJDLQVIURPWUDGHIURPWKH³WUDGHFUHDWLRQHIIHFW´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

,QRWKHUZRUGVFRQGLWLRQ IDLOVLQWKHHTXLOLEULXPZLWKWLHVIRUWKHDOORFDWLRQRIWKHZRUOGODERUHQGRZPHQWWKDW \LHOGVWKLVEDVHOLQHVROXWLRQ1RWHWKDWWKHYDOXHRIZ'ZLQWKLVHTXLOLEULXPPXVWEHKLJKHUWKDQLQWKHHTXLOLEULXP ZLWKRXWWLHVWKHEDVHOLQHVROXWLRQ EHFDXVHWKHWLHVGLYHUWODERUGHPDQGRIFRXQWU\SURGXFHUVIURPFRXQWU\WR FRXQWU\ 

$UHIHUHQFHSULFHLVDSULFHWKDWLVTXRWHGLQDWUDGHSXEOLFDWLRQIRUH[DPSOH ZLWKRXWDQLGHQWLI\LQJEUDQGQDPH

 WRUHSDWULDWHSURILWV,QWKLVVXEVHFWLRQZHZLOOVKRZKRZWKHPRGHOFDQDGGUHVVWKLVLVVXHTXLWH QDWXUDOO\DIWHUVRPHUHLQWHUSUHWDWLRQRIWKHDJHQWVDQGYDULDEOHV :HEHJLQE\UHLQWHUSUHWLQJ³SURGXFHUV´DVZKROHVDOHUVHQJDJHGLQERWKGRPHVWLF GLVWULEXWLRQDQGLPSRUWH[SRUWDFWLYLWLHV,QVWHDGRISXUFKDVLQJ³ODERU´ZKROHVDOHUVSXUFKDVH JRRGVIURPPDQXIDFWXUHUVDQG³ZDJHV´FDQWKHQEHLQWHUSUHWHGDVSURGXFHUSULFHV:KROHVDOHU ³W\SHV´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

VSHFLILFDWLRQRIWKHSURGXFWLRQIXQFWLRQ),WLVHDVLO\VKRZQWKDWWKLVLPSOLHVDVPDOOHUHODVWLFLW\ RIWKHSURILWIXQFWLRQLQHTXDWLRQ ZLWKUHVSHFWWRWKHSURGXFHUSULFHZ,QWXLWLYHO\WKHPRUH ³FRPPRGLILHG´LVWKHSURGXFWWKHPRUHSULFHVHQVLWLYHDUHWKHSURILWVRIWKHZKROHVDOHUVWKDW KDQGOHLW7KHFRQWLQXXPRISURGXFWVIURPPRVWGLIIHUHQWLDWHGWRPRVWKRPRJHQHRXVWKDWZH VHHNFDQWKXVEHLQGH[HGE\ ZLWKLQFUHDVLQJ FRUUHVSRQGLQJWRLQFUHDVLQJKRPRJHQHLW\ ,QWKLVLQWHUSUHWDWLRQRIWKHPRGHOWKHYROXPHRIWUDGHLQDQ\JRRGLVJLYHQE\WKH SXUFKDVHVRILQWHUQDWLRQDOO\PDWFKHGIRUHLJQZKROHVDOHUVIURPWKHLUDIILOLDWHGPDQXIDFWXUHUVIRU UHVDOHE\WKHLUSDUWQHUKRPHZKROHVDOHUVWRWKHLUDIILOLDWHGHQGXVHUV:HDUHLQWHUHVWHGLQKRZ WKHSHUFHQWDJHFKDQJHLQWKLVYROXPHZLWKUHVSHFWWRPWKHVKDUHRIZKROHVDOHUVRIWKDWJRRGWKDW DUHWLHGYDULHVZLWK ,QRUGHUWRLVRODWHWKHHIIHFWRI ZHDVVXPHWKDWPWDQGWKHIRUHLJQFRVW

 DGYDQWDJHJLYHQE\WKHUDWLRRISURGXFHUSULFHVZ 'ZDUHWKHVDPHDFURVVDOOJRRGV:HWKHQ FRQVLGHURQO\WKHFDVHZKHUH  Z 'Z WIRUDOOJRRGVVLQFH !W\LHOGVQRWUDGHLQWKDW JRRGDQG  WFDQKROGIRUDWPRVWRQHJRRG,QWKLVFDVHWKHYROXPHRIWUDGHIRUDQ\JRRG IRUZKLFKWKHUHLVDXQLWPDVVRIZKROHVDOHUVLQHDFKFRXQWU\LVJLYHQE\

  + P -  - P > - W + y @  -p ‡ Z  9 =  - W    





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

 

 

 > - W + y @ G9 = +  -p ‡ Z    - W  GP 'LYLGLQJE\9\LHOGV



6LQFHZHDUHH[DPLQLQJSHUFHQWDJHFKDQJHVLQWKHYROXPHRIWUDGHVFDOLQJE\WKHPDVVRIZKROHVDOHUVLQHDFK FRXQWU\IRUWKHSDUWLFXODUJRRGZLOOREYLRXVO\QRWDIIHFWWKHUHVXOWV 

,WWKHUHIRUHGRHVQRWPDWWHUZKHWKHUZHFRQVLGHUSHUFHQWDJHFKDQJHVLQWKHYROXPHRUYDOXHRIWUDGH:HPXVW YLHZ3URSRVLWLRQDVUHIHUULQJWRWKHLPSDFWRIFKDQJLQJWKHVKDUHRIZKROHVDOHUVWKDWDUHWLHGIRUWKHSURGXFWLQ TXHVWLRQRQO\VWDUWLQJIURPDQHTXDOVKDUHRIWLHGZKROHVDOHUVIRUDOOSURGXFWV



 

G9  > - W + y @ 9 = + GP   - W 

   + P -  - P > - W + y @    - W     



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¶VZDJH UHVRXUFHSULFH LVPRUHVHQVLWLYHWRFKDQJHVLQGRPHVWLFWKDQIRUHLJQODERUVXSSO\DQGWUDGH

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



(DWRQDQG.RUWXP FRPSXWHDYHU\ODUJHWRWDOVKRUWIDOOEXWFDQQRWDOORFDWHLWEHWZHHQYDULRXVFDXVHV

 5HIHUHQFHV %HFNHU*DU\67KH(FRQRPLFVRI'LVFULPLQDWLRQ&KLFDJR8QLYHUVLW\RI&KLFDJR  %HOGHUERV5HQpDQG6OHXZDHJHQ/HR³7DULII-XPSLQJ'),DQG([SRUW6XEVWLWXWLRQ -DSDQHVH(OHFWURQLFV)LUPVLQ(XURSH´,QWHUQDWLRQDO-RXUQDORI,QGXVWULDO2UJDQL]DWLRQ  %HUQDUG$QGUHZ%DQG%UDGIRUG--HQVHQ³([FHSWLRQDO([SRUWHU3HUIRUPDQFH&DXVH (IIHFWRU%RWK"´-,QW(FRQSS 'HDUGRUII$ODQ9³/RFDO&RPSDUDWLYH$GYDQWDJH7UDGH&RVWVDQGWKH3DWWHUQRI 7UDGH´:RUNLQJ3DSHU$QQ$UERU0,'HSDUWPHQWRI(FRQRPLFV8QLYHUVLW\RI 0LFKLJDQ (DWRQ-RQDWKDQDQG6DPXHO.RUWXP³7HFKQRORJ\*HRJUDSK\DQG7UDGH´:RUNLQJ 3DSHU%RVWRQ0$'HSDUWPHQWRI(FRQRPLFV%RVWRQ8QLYHUVLW\ (QJHO&KDUOHVDQG-RKQ+5RJHUV³+RZ:LGH,VWKH%RUGHU"´$PHULFDQ(FRQRPLF 5HYLHZ'HFHPEHU  )HOGVWHLQ0DUWLQ6DQG&KDUOHV+RULRND³'RPHVWLF6DYLQJDQG,QWHUQDWLRQDO&DSLWDO )ORZV´(FRQRPLF-RXUQDO-XQH  )UHHPDQ5LFKDUG%³$UH