DP15896 Government Policies in a Granular Global Economy

Author(s): Cécile Gaubert, Oleg Itskhoki, Maximilian Vogler
Publication Date: March 2021
Keyword(s): Antitrust, granular comparative advantage, import tariff, industrial policy
JEL(s): F12, F13, L13, L40, L52
Programme Areas: Industrial Organization, International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15896

We use the granular model of international trade developed in Gaubert and Itskhoki (2021) to study the rationale and implications of three types of government interventions typically targeted at large individual firms - antitrust, trade and industrial policies. We find that in antitrust regulation, governments face an incentive to be overly lenient in accepting mergers of large domestic firms, which acts akin to beggar-thy-neighbor trade policy in sectors with strong comparative advantage. In trade policy, targeting large individual foreign exporters rather than entire sectors is desirable from the point of view of a national government. Doing so minimizes the pass-through of import tariffs into domestic consumer prices, placing a greater portion of the burden on foreign producers. Finally, we show that subsidizing `national champions' is generally suboptimal in closed economies as it leads to an excessive build-up of market power, but it may become unilaterally welfare improving in open economies. We contrast unilaterally optimal policies with the coordinated global optimal policy and emphasize the need for international policy cooperation in these domains.