Reports
Discussion Papers
No.881 Behavioral Characteristics of MRIO-Based Global AGE Models with Variable Elasticity of Substitution between Varieties
February 2023
ABSTRACT
This paper explores the indirect spillover effects of trade-related policies that affect welfare gains/losses via variety adjustments mentioned as by Fujita, Krugman, and Venables (2000), where access to a greater variety of intermediate commodities may reduce the costs of production using those intermediates. Using an applied general equilibrium model that incorporate direct cross-border linkages between producers and importing agents, we examine what happens when the elasticity of substitution between varieties from different sources is endogenized. Experimental simulations using the model reveal that the efficiency-enhancing effects of smoother resource allocations (substitution) may work more effectively than the cost-reducing effects of variety adjustments suggested by Fujita et al. (2000). A production sector that exhibits increasing returns to scale under monopolistic competition may serve as the main engine for accelerating the efficiency-enhancing effects to remarkable levels.
Keywords: variable elasticity of substitution, firm heterogeneity, monopolistic competition, multi-regional input-output, applied general equilibrium
JEL classification: C68, D58, F12, L11
PDF available at http://hdl.handle.net/2344/00053596
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