On the relationship between bargaining and tariffs

Transcription

1 On the relationship between bargaining and tariffs prepared for ATW Tomohiro Ara and Arghya Ghosh University of New South Wales March 12, 2011 Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

2 Introduction Recent years have witnessed a significant increase in vertical specialization Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

3 Introduction Recent years have witnessed a significant increase in vertical specialization slicing of the value chain Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

4 Introduction Recent years have witnessed a significant increase in vertical specialization slicing of the value chain international outsourcing Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

5 Introduction Recent years have witnessed a significant increase in vertical specialization slicing of the value chain international outsourcing fragmentation of the production process Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

6 Introduction Recent years have witnessed a significant increase in vertical specialization slicing of the value chain international outsourcing fragmentation of the production process global production sharing Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

7 Introduction Recent years have witnessed a significant increase in vertical specialization slicing of the value chain international outsourcing fragmentation of the production process global production sharing Final-good trade Trade Intermediate-input trade Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

8 Introduction Recent years have witnessed a significant increase in vertical specialization slicing of the value chain international outsourcing fragmentation of the production process global production sharing Final-good trade Trade Intrafirm trade Intermediate-input trade Arm s length trade Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

9 Introduction (cont.) International organization Antràs (QJE, 2003; AER, 2005) Antràs and Helpman (JPE, 2004) Grossman and Helpman (JEEA, 2003; JIE, 2004; RES, 2005) Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

10 Introduction (cont.) International organization Antràs (QJE, 2003; AER, 2005) Antràs and Helpman (JPE, 2004) Grossman and Helpman (JEEA, 2003; JIE, 2004; RES, 2005) Normative analysis has been missing Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

11 Introduction (cont.) International organization Antràs (QJE, 2003; AER, 2005) Antràs and Helpman (JPE, 2004) Grossman and Helpman (JEEA, 2003; JIE, 2004; RES, 2005) Normative analysis has been missing Although the literature on organizations and trade has been largely concerned with matching positive features of reality,, much less attention has been given to the normative and policy implications of changes in the international organization of production (Antràs and Rossi-Hansberg, 2009) Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

12 Introduction (cont.) Main results Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

13 Introduction (cont.) Main results 1a. In the short run, the relationship between bargaining power and tariffs is monotone Lower bargaining power of Southern firms leads to higher tariff rates Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

14 Introduction (cont.) Main results 1a. In the short run, the relationship between bargaining power and tariffs is monotone Lower bargaining power of Southern firms leads to higher tariff rates 1b. However, in the long run, the relationship is usually non-monotone An exception is linear demand Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

15 Introduction (cont.) Main results 1a. In the short run, the relationship between bargaining power and tariffs is monotone Lower bargaining power of Southern firms leads to higher tariff rates 1b. However, in the long run, the relationship is usually non-monotone An exception is linear demand 2. If the market is oligopolistic, Northern firms can benefit from increased bargaining power of Southern firms Equal bargaining power is beneficial for both countries Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

16 Model North Upstream ( i = 1,2 n) U i,..., Is there a relationship between firm s bargaining power and tariffs? Downstream ( i = 1,2 m) D i,..., Simple outsourcing model Contracts for input trade Bargaining over r i and q i Number of successful matches s - s = s(m, n) - e.g., s(m, n) = mn m+n South Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

17 Model (cont.) North Upstream ( i = 1,2 n) U i,..., Downstream ( i = 1,2 m) D i,..., Demand World demand: Q = Q(P) - Southern demand: Q S = µq(p) - Northern demand: Q N = (1 µ)q(p) - Assume µ = 1 Inverse demand: P = P(Q) - P (Q) < 0-2P (Q) + QP (Q) < 0 South Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

18 Model (cont.) North Upstream ( i = 1,2 n) U i,..., Timing 1. Southern government sets a tariff to maximize Southern welfare 2. Bargaining (within a pair) and Cournot competition (across matched pairs) Downstream ( i = 1,2 m) D i,..., South Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

19 Bargaining Generalized Nash bargaining β: Southern firm 1 β: Northern firm Taking (r j, q j ) as given, each pair i chooses (r i, q i ) to maximize (br i, bq i ) = argmax r i,q i π β D i π 1 β U i subject to π Di 0 and π Ui 0 where π Di = [P(Q) r i ]q i and π Ui = (r i c t)q i Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

20 Bargaining (cont.) There exists a symmetric equilibrium ( r, q) br 1 =... = br s br (> 0) bq 1 =... = bq s bq (> 0) such that bq = P(sbq) c t P (sbq) br = (1 β)p(sbq) + β(c + t) Note that β P(sbq) br = 1 β br c t Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

21 Tariff The government chooses a tariff rate to maximize Southern welfare: " Z bq # W P(y)dy P( Q) b Q b h + {P( Q) b br} Q b i + tq b 0 From comparative statics, dq b dt = s/p ( Q) b s ɛ < 0; dbr s + β(1 + ɛ) = > 0 dt s ɛ where ɛ P ( b Q) b Q P ( b Q) > 2, we get dw dt t=0 = b Q» (1 + ɛ) β(2 + ɛ) s ɛ Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

22 Tariff (cont.) Proposition 1 Starting from free trade, a small increase in tariff rate raises Southern welfare if and only if bargaining power of Southern firms is lower than a critical threshold: dw R 0 β Q 1 + ɛ dt t=0 2 + ɛ β(ɛ) b MB, MC MC CS PS MB TR 0 tariff ˆ subsidy 1 Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

23 Optimum tariff Proposition 2 (i) The optimum tariff is positive if and only if bargaining power of Southern firms is lower than the threshold β(ɛ): b bt R 0 β Q β(ɛ) b (ii) The optimum tariff is monotonically decreasing in bargaining power of Southern firms: bt/ β < 0 The optimum tariff is given by bt = P ( b Q)bq (2 + ɛ) b β(ɛ) β Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

24 Optimum tariff (cont.) tˆ CS + TR tariff 0 βˆ ( ε ) 1 β Domestic oligopoly subsidy The relationship between bt and β is monotone Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

25 Northern profits Consider the relationship between Northern profits (π U ) and Southern bargaining power (β) Let Π be the joint profit, Π [P( b Q) c t]bq, where π U = (1 β)π = (br c t)bq π U β = {z} Π + (1 β) Π t t β share effect ( ) {z } size effect (+) (π D = βπ = [P( b Q) br]bq) Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

26 Northern profits (cont.) Proposition 3 An increase in bargaining power of Southern firms can lead to an increase in Northern profits if the market is oligopolistic, i.e., s [1, 2 + ɛ) U ~ ˆ 0 1 size share share size Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

27 Long-run equilibrium tˆ ε > 0 0 βˆ ε = 0 1 β ε < 0 The relationship between bt and β is non-monotone Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17

28 Conclusion In the short run, An increase in bargaining power in Southern firms reduces the optimum tariff (Prop 1 & 2) Northern firms could also benefit from an increase in Southern bargaining power (Prop 3) In the long run, The relationship between tariffs and bargaining power is generally non-monotone Ara and Ghosh (UNSW) On the relationship between bargaining and tariffs March 12, / 17