title: Essays on the Role of Preferences in International Trade Theory
Creators: name: Habermeyer, Simone
Publisher: name: University of Bayreuth
Year: 2019
Subjects: subject: Nonhomothetic preferences
subject: PIGL preferences
subject: Rent sharing
subject: Wage bargaining
subject: Search frictions
subject: Trade structure
subject: Welfare effects of trade
subject: Welfare and employment effects
subject: 330

description: The main research focus of this thesis lies on the role of preferences in international trade theory, with a particular emphasis on how preferences determine the production structure, shape the trade pattern and influence the welfare effects of trade in open economies. The articles in this thesis contain three modeling approaches, which discuss the central topic of preferences in trade theory from different perspectives: (i) a specific form of parametric “price-independent generalized-linear” (PIGL) preferences with price distortion on the labor market, (ii) more general parametric PIGL preferences with a perfectly competitive labor market and (iii) a specific form of parametric PIGL preferences with search frictions and a labor market imperfection. This allows a broad discussion on how preferences affect the equilibrium outcomes in closed and open economies depending on the modeling approach. After a short introduction in Chapter 1, Chapter 2 relies on a subclass of parametric PIGL preferences and includes rent sharing to capture feedback effects of trade on income. This generates a two-way linkage between income and trade. We set up a home-market model with two sectors, producing differentiated goods and a homogeneous outside good, and labor as the only factor input. Assuming that households differ in their effective labor supply, this leads to differences in their level of labor income. We show that the country featuring a higher ex ante level and/or dispersion of per-capita income has a larger home market and becomes net-exporter of differentiated goods in the open economy. Due to a price distortion on the labor market, the trade pattern is an important factor of welfare in the open economy. The country that increases its market share and net-exports differentiated goods benefits from trade, whereas the other country can lose. Chapter 3 displays a generalization of Chapter 2 with regard to the choice of preferences, as it relies on a more general form of parametric PIGL preferences, giving rise to an integrability problem. Introducing differentiated intermediate goods that are costlessly assembled to a nontradable, homogeneous luxury good in the model variant of Chapter 2 with perfectly competitive labor markets, allows us to solve the integrability problem for two homogeneous final goods. In the open economy, all other things equal, this makes the country with the relatively higher demand for the luxury good and thus the larger domestic market for differentiated intermediates a net-exporter of intermediate goods. However, with the same market clearing wage paid in the two sectors, the welfare effects of trade are always positive for both trading partners, irrespective of the trade structure. Chapter 4 contains a two-country model featuring the same parametric PIGL preferences as in Chapter 2. Adding search frictions and firm-level wage bargaining, Chapter 4 elaborates on the role of preferences for employment and welfare effects of trade. We introduce a home-market model with a homogeneous goods sector, producing under perfect competition, and a differentiated goods sector, distorted on the labor market. In the open economy, the larger country specializes on the production of differentiated goods and net-exports these goods, at the cost of a higher economy-wide rate of unemployment. The welfare effects of trade depend on the preference structure, such that the large country is likely to benefit from trade if preferences are homothetic, whereas losses from trade are possible if preferences are quasilinear. The opposite is true in the smaller country. The thesis concludes with a summary in Chapter 5.