Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/229525
Authors: 
Yanase, Akihiko
Long, Ngo Van
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8707
Abstract: 
This paper develops a two-country model of intraindustry trade with trade costs, which can be reduced by public investment in an international infrastructure capital, the stock of which accumulates over time. Depending on the trade costs and international distribution of manufac-turing firms, equilibrium patterns of trade are determined, and national welfare in each country is affected by these trade patterns. Taking the relationship between trade costs and national welfare into consideration, the governments carry out a dynamic game of public investment. We show that the dynamic equilibrium of the policy game may exhibit history dependency; if the initial stock of international infrastructure is smaller (larger) than a certain level, the infrastructure stock decreases (increases) over time, and the world economy will end up in autarky (two-way free trade) in the long-run. We also show that international cooperation is beneficial in the sense that it may enable the world economy to escape from a “low development trap.”
Subjects: 
public infrastructure capital
intraindustry trade
differential game
multiple equilibria.
JEL: 
C61
C73
F12
H54
H87
O18
Document Type: 
Working Paper

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