Essays in international trade

by Mukhopadhyay, Abhiroop.

iii In their attempts to become more open, policy makers can, with the best of intentions, adopt policies that have unforeseen and often undesirable side effects. Australia, New Zealand and Colombia in 1980s and 90s, attempted a gradual phase out of quantitative restrictions by converting quotas to equivalent tariffs followed by a reduction in these tariffs. This was undertaken by auctioning import quota licenses and using the auction prices as a source of information for setting equivalent tariffs. In Australia, bidders (who participated in a series of uniform price auctions) offered to pay, not a price for the license, but an ad-valorem tariff in excess of the base rate, or the premium for short. These licenses were transferable and a few brokers coordinated transactions in the secondary market. When auctioning quota licenses, the authorities wanted to discourage frivolous bidders as well as ensure that allocated licenses were claimed and utilized. To prevent frivolous bidding, only registered bidders could bid in the auction. To ensure utilization and discourage hoarding, security deposits were collected upon acceptance of allocation. These deposits were refunded when the licenses were used. The collection of security deposits may be seen as a harmless policy with the only discernable cost being the opportunity cost of the funds while they are on deposit. I (with Susumu Imai and Kala Krishna) argue in chapter 1 that, at least in the Australian context, this is not so. In Chapter 2, I (with Susumu Imai, Kala Krishna and Ling Hui Tan) examine the role of middlemen (brokers) in an imperfect secondary market for quota licenses. Middlemen facilitate trade when markets are thin, as potential buyers and sellers find it difficult to meet and transact directly. However, in thin markets, middlemen also have the ability to influence the terms on which trades occur, and the wedge they create between the buying and selling price limits the extent to which they facilitate trade. We develop and simulate a model of middlemen in the market for quota licenses and estimate the reduced form of the model using data from an Australian textile/clothing/footwear quota broker. Our simulations show that both prices fall over time and are inversely related to the stock held by the middlemen. When availability outside is higher or when people do iv not value the license very highly, both prices tend to fall. When there is greater dispersion of valuation in the economy, the wedge is larger. Welfare analysis suggests that the greater heterogeneity leads to greater welfare losses. Reduced form regressions bear out the predictions made by the simulated model.