Download - A State-Centered Approach to the Politics of Trade READING ASSIGNMENT: Oatley – Chapter 5 1
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A State-Centered Approach to the Politics of Trade
READING ASSIGNMENT: Oatley – Chapter 5
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Plan
• What does the state want?
– Survival
• Why would the state intervene?
– Infant Industries
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What does the state want?
• Improve overall welfare
• Increase its relative power
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What does the state want?
• SURVIVAL!
• Political Institutions shape the incentives of political leaders
• Under democracy, leaders survive by winning votes
• Under dictatorship, leaders survive by satisfying elite constituents: – military, big business, foreign interests
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Democracy vs. Dictatorship
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Hazard Rate over Time for Democracies (Solid Line) & Dictatorships (Dotted Line) – Time in years
2015105
0.625
0.5
0.375
0.25
Time (years)
Hazard Rate
Time (years)
Hazard Rate
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Time in office
• Does *not* improve a democratic leader’s chances in office
• What then helps democratic leaders survive?
• PROVISION OF “PUBLIC GOODS”
• In the United States:– Economic Growth
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Time in office
• *Does* improve an autocratic leader’s chances in office
• Why?
• PROVISION OF “PRIVATE GOODS”
• Pay off a small, loyal group of supporters– Military elites
– Business elites9
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Changing focus toA more specific institution: Legislative Representation
• Proportional?
• Or Malapportioned?
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Who needs the most gasoline per capita?Urban v Rural
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Policy outcome?
• We’ve got Interests & Incentives
• Now, to get the policy outcome,…
• We interact interests/incentives with a domestic political institution:
Malapportionment!
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Malapportionment tends to weigh RURAL preferences more than URBAN
(i.e., Proportional representation tends to weigh URBAN preferences more than RURAL)
Does this have an effect on NATIONAL policy?
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Test:
• Does malapportionment affect:
–Gasoline prices
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How can the state get what it wants?
• Industrial Policy
• Tariffs
• Subsidies
• Investment
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Why does the state protect?
• One answer: Infant industries
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Infant-industry case
• Long-run welfare gains created by a new industry will be greater than the short-run losses of social welfare
• “infant” industries – like children who need the “protection” of their parents until they grow strong
• Comparative advantages are DYNAMIC
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• Both states are better off with trade…BUT• Would you rather live in Brazil with trade?• Or the United States with autarky?
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Infant Industry Argument 1:Fixed costs & Economies of scale
• Economies of scale refers to the decreased per-unit-cost as output increases.
• The initial investment of capital is diffused (spread) over an increasing number of units of output
The marginal cost of producing a good or service decreases as production increases
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Example
• Suppose an industry requires an initial investment (fixed cost) of $1000
• With 100 customers, the Average Fixed Cost is $10
• With 200 customers, the Average Fixed Cost becomes $5
• This results in a lower average total cost
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• No economies of scale:– If costs increase proportionately to the quantity of all
input factors
• Diseconomies of scale:– If costs increase by a greater amount than the
quantity of all input factors
• Economies of scale:– If costs decrease by a greater amount than the
quantity of all input factors
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A different way to approach “returns to scale”
• Where all inputs increase by a factor of 2, new values for output should be:
– Twice the previous output = ?
• a constant return to scale
– More than twice the previous output = ?
• an increased return to scale
– Less than twice the previous output = ?
• a decreased return to scale23
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Formal notation• Y is output, K is capital, L is labor, F is the production function:
Y=F(K,L)
• Suppose we double our inputs:
2K, 2L
• F(2K,2L) = ???
–How much does Y increase?
• If F(2K,2L) = 2F(K,L) We have _______ returns to scale
–CONSTANT
• F(2K,2L) > 2F(K,L) We have _______ returns to scale
–INCREASING
• If F(2K,2L) < 2F(K,L) We have _______ returns to scale
–DECREASING 24
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Slightly more abstract notation
• Y is output, K is capital, L is labor, F is the production function, a is the increase in inputs
• Y=F(K,L)
• If F(aK,aL)=aF(K,L) Constant returns to scale
• If F(aK,aL)>aF(K,L) Increasing returns to scale
• F(aK,aL)<aF(K,L) Decreasing returns to scale
• For fun: Apply this to the “Cobb-Douglas” production function! Yippee!
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Bringing the two sets of concepts together?
• Y=F(K,L) + start up costs
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You can have increasing returns to scale if…
Start-up costs are high
And/or if investments in inputs generate disproportionately high increases in outputs
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Infant Industry Argument 2:Economies of experience
• Efficient production requires specific skills that can only be acquired through production in the industry
– Experienced management
– Skilled workers
– Network of suppliers
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Why can’t markets efficiently educate / train the workforce?
• Trained people may leave the firm, taking their skills elsewhere
• Missing market:– “Futures market for labor”
• Externalities from education?
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Economies of scale &/or experience can lead to:
• Oligopoly, market power
• Barriers to entry
• First mover advantages
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Suppose an industry where market-demand supports only one firm (high tech – e.g., aircraft)
PRODUCE NOT PRODUCE
PRODUCE – 5, – 5 100, 0
NOT PRODUCE
0, 100 0, 0
European firm
What are the two EQUILIBRIA? (R,C)
US firm
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Equilibrium:
• An outcome where no player has an incentive to deviate from his or her chosen strategy given the strategies of the other players.
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Whoever moves first wins!
• http://www.youtube.com/watch?v=K4GAQtGtd_0&feature=related
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Now suppose the US moved first, but Europe offers a subsidy… (R,C)
PRODUCE NOT PRODUCE
PRODUCE – 5, 5 100, 0
NOT PRODUCE
0, 110 0, 0
European firm
US firm
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Take-aways
• What do governments want? Survival• Democracy v. Autocracy• Malapportionment• Why does the state intervene?• Infant Industries• Economies of Scale• Increasing returns to scale• Economies of experience• First mover advantages• Equilibria
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Thank youWE ARE GLOBAL GEORGETOWN!
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