Abstract
Three core normative propositions of the theory of international trade have been established in the context of finite competitive economies of the Walras−Arrow−Debreu or McKenzie (WADM) type. Whether the propositions survive the recognition that economies might last forever, with overlapping generations (OLGs) of mortal individuals and intergenerational bequests, is still unknown. In the present chapter, it is shown that none of the core propositions survives the recognition of intergenerational bequests. It is also noted that, if a particular tailor-made assumption is introduced, all three propositions survive.
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- 1.
Ohyama (2002) and Panagariya and Krishna (2002) produced a result not unlike Proposition (c). However, their finding was based on the assumption that each country chooses its new tariff vector so that its vector of imports remains at its initial level, whereas Proposition (c) was established under the weaker Kemp−Wan assumption that only the aggregate import vector of the free trade association need be kept at its initial level.
- 2.
After reading Kemp and Fishburn (2013), several distinguished theorists wondered why we had confined our attention to just three of the much larger set of normative trade propositions. In this brief chapter, we outline the reasoning of our earlier paper. We focussed with core proofs because only they are always valid under the core assumptions.
- 3.
The core propositions have been based on the additional assumption that lump-sum compensatory payments can be made by governments without distorting the worldwide allocation of resources. That assumption has been examined in the companion papers of Kemp and Wan (1986b, 1999). This feature of our analysis contrasts sharply with the analysis of Aiyagari (1989) and that of his predecessors, who work with single-parent families and endow some individuals with perfect knowledge of the preferences of all their descendants.
- 4.
Indeed, assumptions (ii) and (iii), allowing household preferences and endowments to differ within and across generations are weaker than is customary in models incorporating OLGs . Moreover, not all of these assumptions were needed by Kemp and Wolik. The assumption that all commodities are perishable was not needed; nor was the assumption of two-parent families – Kemp and Wolik might have relied on the alternative Platonic assumption of one-parent families or on a blend of the two assumptions.
- 5.
The proofs provided by Kemp and Wolik (1995) were correct in intent but marred by several notational misprints.
- 6.
- 7.
Each pair of parents knows its own children and their partners in marriage, but they cannot know their adult grandchildren. Parents will therefore play the “bequest game” with only their own children and children-in-law in mind.
- 8.
Under autarky , the games played in any particular country are played only by the parents and parents-in-law of that country. Hence, the proposed intervention of the government under free trade rules out all international bequests .
- 9.
For this outcome, it suffices that, after the formation of the customs union, at least one household in a member country engages in consumption substitution or is a shareholder in a firm that engages in production substitution; see Kemp and Wolik (1995: Theorem 4).
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Kemp, M.C., Fishburn, G. (2018). The Rise and Fall of Normative Trade Theory. In: Tran-Nam, B., Tawada, M., Okawa, M. (eds) Recent Developments in Normative Trade Theory and Welfare Economics. New Frontiers in Regional Science: Asian Perspectives, vol 26. Springer, Singapore. https://doi.org/10.1007/978-981-10-8615-1_2
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