Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71174
Authors: 
Egger, Hartmut
Falkinger, Josef
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper: Trade Policy 4166
Abstract: 
This paper introduces a model of limited consumer attention into an otherwise standard new trade theory model with love-of-variety preferences and heterogeneous firms. In this setting, we show that trade liberalization needs not be welfare enhancing if the consumers' capacity to gather and process information is limited. Rather, it intensifies competition for scarce consumer attention, thereby triggering wasteful advertising, and it may divert purchases to imported goods at an inefficient scale. Wasteful advertising provides scope for policy intervention in the form of an advertising tax. However, the tax instrument cannot eliminate inefficient diversion of consumer purchases to imports. Therefore, even under an optimal advertising tax, neither a fall in transport costs nor advancements in the global distribution of information need generate gains from trade in this framework.
Subjects: 
new trade theory
heterogeneous firms
gains from trade
love-of-variety preferences
limited attention
advertising
JEL: 
D11
F12
F15
L10
M37
Document Type: 
Working Paper

Files in This Item:
File
Size
347.87 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.