Rikard Forslid

Tax competition and economic geography

Tax competition between two countries is considered in a trade- and-location setting with differentiated products and monopolistic competition. There are two groups of workers, mobile ones and immobile ones. Taxes are used for producing a public good. It is shown that an equilibrium with mobile workers dispersed across countries is destabilised by increased taxes on these mobile workers|and this is shown to be true also for perfectly coordinated tax increases. It is also shown that an agglomeration is taxable, and that increasing public spending may relax the minimum tax pressure on immobile workers consistent with preserv-ing an agglomeration.

Trade Liberalization with Heterogeneous Firms

This paper examines the various aspects of trade liberalization with heterogeneous firms using the Melitz (2003) model. We find a number of novel results and effects including a Stolper–Samuelson-like result and several results related to the volume of trade, which are empirically testable. We also analyze what might be called an anti-variety effect as the result of trade liberalization. We show that this effect is most pronounced for small countries. This resonates with the often voiced criticism from antiglobalists that globalization leads the world to become more homogeneous by eliminating local specialties. Nevertheless, we find that trade liberalization always leads to welfare gains in the model.

Trade Liberalization and Endogenous Growth: A Q-Theory Approach

This paper has two purposes. It introduces a direct approach to policy analysis in endogenous growth models - the q-theory approach - and uses this to illustrate several new openness-and-growth links that appear when we enrich the economic content of the early trade and growth models. The approach - inspired by Tobins q - is merely a change of state variables and re-interpretation of steady-state conditions. The main difference is its focus on investment, which is after all, the heart of growth models. The approachs simplicity permits us to complicate the early models in interesting directions and to explicitly include trade barriers. The latter allows study of incremental policy reform rather than mere shifts from autarky to free trade (or small deviations from free trade) as in early literature.

Comparative Advantage and the Location of Production

The paper returns to a familiar topic in international trade, comparative advantage, introducing it into Krugmans classic, core-periphery model of economic geography. This extra force of dispersion radically changes the stability properties of the model. Instead of the familiar result that trade liberalization leads to increased industrial concentration, lowering trade costs leads initially to increased concentration and then to dispersion of production. When a pattern of comparative advantage exists, integration may lead to international specialization of production. This may be good news for peripheral countries, which may be able to retain industry despite the attraction of the core.

Investment Creation and Investment Diversion: Simulation Analysis of theSingle Market Programme

This paper studies the investment creation and diversion effects of the EUs Single Market programme (EU92). We first present empirical evidence which suggests that EU92 caused investment diversion in the European Free Trade Association (EFTA) nations and investment creation in the EU. The economic logic behind this is simple. Discriminatory liberalization shifts production of tradable goods from nonintegrating countries to the integrating region. Since tradable sectors are capital intensive relative to nontraded sectors, the production shifting raises the rental rate in the integrating regions, lowering it elsewhere. Investment creation and diversion is the result. To simulate what would have occurred if the EFTAns had never gained access to EU92 (via EU membership or the European Economic Area), we employ a computable general equilibrium model with endogenous capital stocks. The results show a modest drop in EFTA capital stocks when they are excluded from EU92, but an important rise (almost 5%) when they are included. In terms of real income, the difference between the included and excluded cases is quite large for the EFTAns (5.5% of GDP). In all cases, the EU experiences investment creation and income gains. The effects on the US and Japan are trivially small, but mostly negative in terms of capital stocks and real income.

Trade and Location with Horizontal and Vertical Multi-region Firms*

This paper analyses the effect on agglomeration tendencies of allowing firms to become multi-region firms in a standard model of trade and location. More specifically, we introduce horizontal and vertical multi-region firms into the core-periphery (CP) model developed by Krugman (1991). The introduction of horizontal multi-region firms dampens the strong agglomeration effects found in the CP model by making the range of trade costs for which the core-periphery equilibrium occurs smaller. The introduction of vertical multi-region firms that can separate the location of headquarter activities from the location of production has two counteracting effects. First, headquarters have a strong tendency to agglomerate, and, in this sence, agglomeration tendencies are strengthened. Second, actual production tends to be more spread out, and, in this sense, they are weakened.

Incremental trade policy and endogenous growth:: A q-theory approach

Abstract Most trade-and-growth studies focus on the growth effects of autarky-to-free-trade changes, rather than those of incremental liberalisations. This paper characterizes how the strength and sign of openness-and-growth links depend upon the nature and level of trade barriers. For most types of trade barriers, we find that liberalisation raises or lowers growth depending upon the initial level of the barrier. This suggests empirical studies that pool data from high and low protection nations are mis-specified, and that policy lessons based on autarky-to-free-trade results are of limited use to policymakers.

The core-periphery model: key features and effects

More than 25 years ago, Avinash Dixit and Joe Stiglitz developed a simple model for addressing imperfect competition and increasing returns (ICIR) in a general equilibrium setting. Its first application, in Dixit and Stiglitz (1977), was to an issue that now seems rather banal – whether the free markets produces too many or too few varieties of differentiated products. But ICIR considerations are so crucial to so many economic phenomena, and yet so difficult to model formally, that the Dixit-Stiglitz framework has become the workhorse of many branches of economics. In this paper, we present one of its most recent, and most startling applications – namely, to issues of economic geography. While there are many models in this new literature, almost all of them rely on Dixit-Stiglitz monopolistic competition, and among these, the most famous is the so-called core-periphery model introduced by Paul Krugman in a 1991 paper. The basic structure of the core-periphery (CP) model is astoundingly familiar to trade economists. Take the classroom Dixit-Stigliz monopolistic-competition trade model with trade costs, add in migration driven by real wage differences, impose a handful of normalisations, and voila, the CP model! The fascination of the CP model stems in no small part from the fact that these seemingly innocuous changes so unexpectedly and so radically transform the behaviour of a model that trade theorists have been exercising for more than 25 years.

Trade and growth Any unfinished business

This paper argues that many trade and growth links – links that play an important role in the thinking of the great trade and growth scholars (Chenery, Myrdal, Lewis and Rostow, inter alia), or play an important role in Europes current public policy debate (competition and state-aids policy, regional polices, the single market, etc.) – have yet to be modelled formally. The paper also argues that trade and endogenous growth models are simpler than generally perceived, so it should be easy to enrich the early trade and growth models using the broad range of trade and IO models developed over the past two decades.

EU Integration and Outsiders. A Simulation Study of industrial Location

This paper focuses on the location effects of preferential trade areas (PTA) on non-members. More specifically, using a CGE model calibrated to real data, it focuses on the impact of tighter European integration on outsider regions. We argue that because theoretical models analysing PTAs have very few contact points with reality, further research is needed to evaluate whether the effects highlighted by these models -catastrophic agglomeration and non-monotonic relocation, for example- are theoretical aberrations of highly specific models, or important effects that help us explain real world events.