Firm, sector, country heterogeneity and economic integration.
PhD thesis, University of Glasgow.
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This PhD dissertation studies the effects of some types of asymmetries in the context of international markets. It pursues two main targets: the first one is to implement an efficiency analysis of different degrees of production factors integration; the second one is to shed further light on the determinants of Pricing-to-Market in order to close the gap on the Purchasing Power Parity.
The first part of the work aims at evaluating whether a full integration of countries or regions is always welfare-improving or not. In case it is not, it tries to establish in which cases and to which extent the mobility of production factors should be constrained in order to yield welfare-improvements. Finally, it turns to the point of view of individual markets, by looking at which one gains and which one loses after integration with other markets. Thus, a static general equilibrium framework is provided. It features (many) heterogeneous monopolistic firms, that are aggregated according to a nested CES function. Two different theoretical scenarios are developed: in the first one, all the production factors in the model (i.e. capital and labour) are assumed to be free mobile across markets; in the second one, one of the inputs, namely labour, is restricted at the individual market level. It turns out that, as long as cross-market demand elasticities are homogeneous, the integrated economy always produces an efficient outcome. However, if markups differ across markets, then full integration yields an inefficient level of production due to misallocation of production factors. In this case, a welfare-superior result can be reached for some exogenous restrictions of labour mobility.
The second part of the thesis addresses the Purchasing Power Parity puzzle by focusing on the determinants of Pricing-to-Market. Thus, in order to understand the reasons why firms price their goods differently across national borders, the model by Atkeson and Burstein (American Economic Review, 2008) is directly extended in two different ways. More specifically, the original framework explains Pricing-to-Market through both imperfect competition with variable markups and international trade costs. However, it is not able to completely match the actual extent of Pricing-to-Market reported in some countries and, particularly, in the United States; therefore, the main goal is to improve that result. The first extension developed consists in adding fixed costs of production and heterogeneity in country level demand preferences to the reference setting. Evidence of cross-country asymmetry in total household expenditure shares on different goods is provided such as of home bias. The second extension, instead, consists in including heterogeneity in international trade costs. Even in this case, evidence of asymmetry in costs to export is shown. According to numerical results, both the extensions are able to improve the reference work: the extent of Pricing-to-Market predicted is closer to the actual value; furthermore, both the ratio of exports to gross output in manufacturing sectors and the share of manufacturing plants that export in the US market are matched.
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