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Spring 2023

Perspectives on globalization

Final Exam

This is an individual assignment and you are NOT allowed to discuss this exam with anyone else. The exam is due on June 29th at 08:00. Please upload it to the Classroom of the course.

Consider the Helpman-Antr‡s 2004 model of outsorcing.  This model is presented in Antr'síbook first with complete contracts (pp. 41-47) and then with incomplete contracts (pp. 95-106). This model assumes that (i) there are two countries; (ii) contracts in North are complete while contracts in South are incomplete; (iii) production uses only labor, and (iv) the wage is higher in North than in South, i.e. wN  > wS .

In the first problem set you were asked to develop an extension of this model in which there is a third country, say East, so that i = N;S;E . You were asked to keep the following assumptions: (A1) all headquarters are located in North; (A2) East has a higher wage than South but not as high as North, i.e.  wN  > wE  > wS , and (A3) contracts are complete in East.  Use this extended model to answer the following questions:

1. Show the equilibrium of this model. In particular, describe the distribution of firms and the patterns of trade. How do these objects depend on the size of the fixed and variable costs of o§shoring?

2.  (East becomes sophisticated in production) Consider a reform in East that lowers the variable costs of headquarter services and the fixed costs of entry enough to make it possible for East to host headquarters (this is a change in assumption A1).  How does this reform change the equilibrium distribution of economic activity around the world? In particular, explain how this reform affects the distribution of firms within each county and the patterns of trade.

3.  (South improves  its  contractual  environment) Consider a reform in South that makes contracts complete (this is a change in assumption A3).  How does this reform change the equilibrium dis- tribution of economic activity around the world? In particular, explain how this reform a§ects the distribution of firms within each county and the patterns of trade.

4. You have used this extended version of the Helpman-Antras model to study the effects of reforms in East and South. What does this exercise tell us about the real world? What are the most important aspects of reality that the theory misses in your opinion?