Shin-Hwan Chiang

Export market correlation and strategic trade policy

In the traditional models of strategic trade policy pioneered by Brander and Spencer, exports of the domestic firm, engaged in a Cournot-Nash competition with the foreign firm in a neutral market, must be subsidized to maximize national welfare. We demonstrate that when the firms play the Cournot-Nash game in two stochastic and positively correlated markets, it may be optimal to tax exports to the more volatile market while subsidizing it in the other. The policy combination reduces the amplitude of aggregate profit and raises the utility of the risk-averse firm in a manner similar to the theory of portfolio choice.

Rural – urban migration of family labor: A portfolio model

Abstract In this paper we develop a family-based rural to urban migration model and offer an alternative explanation of urban underemployment to the well-known Harris-Todaro (H-T) model. We assume that the risk-averse family allocated its members to the rural, urban formal and urban informal sectors so as to maximize the expected family utility. Rural and urban informal sector incomes are assumed to be stochastic and potentially correlated creating an incentive for families to place members in the urban informal sector to reduce the variance of aggregate income. The spatial allocation or migration problem thus coincides with the portfolio choice model in finance. A major finding of the paper is that conventional policy wisdom, derived from the individualistic, expected-income maximizing H-T model no longer holds true in the family-based ‘portfolio’ migration model.

Intraindustry Trade in Identical Products: A Portfolio Approach

In the traditional model, intraindustry trade in an identical product is driven by the profit margin each firm perceives in the rival market on the basis of Cournot conjectures. The authors demonstrate that when markets are stochastic and potentially correlated, benefits from diversification create added incentives for cross--hauling for risk--averse Cournot duopolists. The portfolio motive for cross--hauling makes the unusual pattern of trade a theoretically more robust phenomenon than has been recognized in the traditional models. The benefits from diversification can raise producer welfare in the intraindustry trade equlibrium, unlike in the deterministic model. Copyright Blackwell Publishing Ltd. 2003

Third-Degree Price Discrimination with Demand Uncertainty

The paper analyzes the price, output and welfare effects of third-degree price discrimination triggered by the portfolio motive of a risk-averse monopolist facing random and potentially correlated market demands. It is shown that contrary to conventional wisdom, price discrimination can occur with identical expected demands, the relatively inelastic but risky market may be charged the lower price and despite linear demands, aggregate expected output may fall but expected consumer and producer surplus may rise. These results are shown to be driven by the risk aversion of the monopolist and the asymmetry in the risk and revenue characteristics of the markets.

Optimum choice of invoice currency with correlated exchange rates-super-†

In this paper, we revisit optimal choice of invoice currency for an exporting firm in the face of exchange rate uncertainty. We demonstrate that when a vehicle currency is available, the optimum choice depends not only on the volatility of the exchange rates but the covariance between them as well. In particular, we show that when the exchange rates between the exporter and importer currencies on the one hand, and the exporter and the vehicle currency on the other, are positively correlated, vehicle currency becomes an attractive choice. The intuition underlying this novel outcome is that this regime dampens profit variability for the exporter.

Foreign Investment and the Optimum Terms of Technology Transfer

This paper examines the optimum technology-pricing policy of a country that exports the superior technology to another country in which it has foreign investment. It demonstrates that, contrary to popular belief, full exploitation of technology market need not be the optimum strategy even if it were feasible. Because the technology fee may be negatively correlated with production in the recipient sector as well as returns from foreign investment, the optimum technology fee may well be zero or even negative.