International trade risk taking and welfare

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1、JournalofInternationalEconomics92(2014)363–374ContentslistsavailableatScienceDirectJournalofInternationalEconomicsjournalhomepage:www.elsevier.com/locate/jieInternationaltrade,risktakingandwelfareG.Vannoorenberghe⁎DepartmentofEconomics,CentER;TilburgUniversity,RoomK420POBox901535000LETilburg,Netherl

2、andsarticleinfoabstractArticlehistory:ThispapershowsthatthegainsfromopeninguptointernationaltradearesmallerwhenfirmsdonotfullyReceived28May2013internalizedownwardrisk.Idevelopageneralequilibriummodelwithtwokeyassumptions.First,whenfacedReceivedinrevisedform9December2013withadverseproductivityshocks,e

3、mployerscanlayoffworkerswithoutfullypayingthesocialcostsoftheirlay-Accepted9December2013offdecisions,acommonfeatureofmanyinstitutions.Second,whenopeningtointernationaltrade,theelasticityAvailableonline20December2013ofdemandperceivedbyanindustryincreases.Inthissetup,Ishowthatinternationaltradeinduces

4、firmstotakemoreriskand(i)raisestheequilibriumunemploymentrate,(ii)increasesthevolatilityofsectoralsalesandJELclassification:F1(iii)increaseswelfareproportionatelylessthanintheabsenceoftheexternality.Inducingfirmstointernalizethecostsoflayoff(BlanchardandTirole,2003)thereforeappearsevenmoreimportantinag

5、lobalizedworld.Keywords:©2014InternationalMonetaryFund.PublishedbyElsevierB.V.Allrightsreserved.InternationaltradeVolatilityRisktakingUnemploymentLayofftaxes1.Introductionisrigidinthesensethatfirmsmustrecruittheiremployeesbeforeob-servingtheproductivityshocks(firststage),asinCunatandMelitzThispapersho

6、wsthatthewelfaregainsfrominternationaltradeare(2012).Afterobservingtheshock(secondstage),firmsdecidewhetherdampenedwhenfirmsdonotbearthefullcostsofdownwardrisk.toproduceandpaytheagreedwagetotheiremployeesortolayoffTherearetwopossibleinstitutionalreasonswhyfirmsdonotfullyinter-someorallofthem,inwhichcas

7、elaidoffworkerssitidleandreceivenalizethecostsofbadoutcomes.First,bankruptcylawsandlimitedliabil-onlyafractionofthepromisedwage.Thefactthatfirmsneedtorecruitityregimesinmanycountriesensurethatcreditors