Abstract
The empirical evidence on the causal relationship between international trade and economic growth is inconclusive. While some studies show that trade leads to growth, others have pointed to a reverse causation. In this paper, we develop a model of international trade and productivity growth in the presence of a misallocation of resources. Misallocation in a country arises as a result of lobbying by firms to establish barriers to the competitive allocation of labor. Misallocation prevents the country from exploiting its technological comparative advantage and leads to a reduction in the volume of trade in the absence of any explicit trade barriers. In the model, whether barriers diminish or worsen with productivity growth depends on the extent of the initial resource misallocation. If the initial resource misallocation is not severe, then productivity growth leads to diminishing barriers and vice versa. In either case, productivity growth strengthens the comparative advantage over time and therefore increases the volume of trade.
Acknowledgement
We would like to thank the associate editor and two anonymous referees for their comments.
Appendix
Proof of Proposition 1: As is clear from Equation (11), the optimal contribution of type B firms in the interval [0, θρ) is β* = 0. On the interval [θρ, ∞), the payoff πB has a derivative equal to (θρhB/β2 − 1) which is greater than, equal to, or less than 0 as θρhB is greater than, equal to, or less than β2. It follows also that if this derivative is less than zero at θρ, then it is less than zero on the entire interval [θρ, ∞). Therefore, if the derivative is negative at θρ, then the optimal value for β on [θρ, ∞) is β = θρ. In this case, the globally optimal β, as established above, is β = 0.
If the derivative at β = θρ is positive, that is, if ρ < hB/θ, then the optimal β on [θρ, ∞) is
However, this value of β is globally optimal if and only if the payoff at β = (θρhB)1/2 is greater than the payoff obtained when β = 0. This requires
This establishes that the optimal value for β, β*, is
Given the values for β* in Equation (33), we can now determine the optimal allocation for the type R leader. As is clear from Equation (33), the optimal value for ρ lies in the interval [0,
Let f(ρ) ≡ (θρ)1/2hR/hB1/2 − ρ and note that f′(ρ) >, <, or = 0, as ρ <, >, or = ρ* ≡ (θ
Suppose θ < (hB/hR) and thus ρ* is less than
Note that when ρ = ρ* ≡ (θ
The quadratic function g(θ) has zeros at θ = (hB/hR)(2 −
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