In “Trade, Tastes and Nutrition in India“, David Atkin introduces habits in consumption into a specific factors model of agricultural trade. If a country starts in autarky, then people become habituated to consuming the food produced by their abundant factors. This correlation of tastes and endowments means that when the economy opens to trade, the relative price of that good (for which autarkic consumers developed a habit) will rise. This reduces the consumption of food nutrients in the short-run compared to the habit-free case, as consumers don’t shift over to newly cheap imported foods as quickly as assumed.

Atkin doesn’t focus much on welfare comparisons, which are difficult in such a dynamic, habit-formation context; rather, he’s concerned with nutritional intake. He argues that nutrition matters – policymakers do care, nutrition impacts growth potential, and childhood malnutrition can have persistent long-run effects.

Atkin’s empirical testing ground is India, which has internal agricultural markets that are not very integrated. There are high transport costs, poor infrastructure, and state governments set agricultural policy, including production subsidies and tariffs on agricultural imports from other states.

I examine the predictions of this model of trade with habit formation using household survey data from India, where internal agricultural trade remains highly restricted. I identify tastes with the unexplained regional variation in household demand for agricultural products and find that regional tastes favor food crops that are well-suited to local agro-climatic conditions. I predict that the liberalization of internal agriculture trade in India will generate short-run caloric losses unless income gains from trade are relatively large, and that there would be no such losses if tastes were identical across the country. I also examine the consumption patterns of inter-state migrants, and find that they consume fewer calories for a given level of food spending than otherwise similar consumers. This effect only disappears two generations after migration, as tastes adjust to local prices. These findings, which reflect the higher prices of preferred origin-state goods in the migrant’s destination state, further corroborate the assumptions of my model.

In a 1996 article, William Milberg surveyed all international trade articles appearing in the AER, JPE, RES, and JIE from 1988 to 1992. He described two notable shortcomings:

Of articles containing no policy conclusions, 55.9 per cent included empirical studies. Of articles with policy relevance, only 16.1 per cent had empirical content. This is precisely the opposite of the expectation that policy-relevant research will tend to be grounded on empirical support, and that when such relevance is not at stake, empirical support will be less important. According to the survey, empirical analysis is often used to explore positive issues, whereas policy-related issues are most often analyzed using purely theoretical arguments…

[I]n a field where writing structure and even methodology are otherwise extremely uniform, the rhetoric of policy relevance is diverse, flexible and unrigorous. Paradigmatic convention seems not to dictate this aspect of the discourse. Norms of systematic and logical analysis break down precisely where the most is at stake in economic analysis – the legitimacy of its policy conclusions.

It’d be fascinating to see such an analysis of the recent literature.

Hat tip: Matthew Eagleton-Pierce.

Krugman, Paul 2009. “The Increasing Returns Revolution in Trade and Geography.” American Economic Review, 99(3): 561–71.

Opp, Sonnenschein, and Tombazos, forthcoming in the JIE:

We demonstrate that Rybczynski’s classic comparative statics can be reversed in a Heckscher-Ohlin world when preferences in each country favor the exported commodity. This taste bias has empirical support. An increase in the endowment of a factor of production can lead to an absolute curtailment in the production of the commodity using that factor intensively, and an absolute expansion of the commodity using relatively little of the same factor. This outcome – which we call “Reverse Rybczynski” – implies immiserizing factor growth. We present a simple analytical example that delivers this result with unique pre- and post-growth equilibria. In this example, production occurs within the cone of diversification, such that factor price equalization holds. We also provide general conditions that determine the sign of Rybczynski’s comparative statics.

Marc Melitz nicely summarizes the empirical and theoretical literature on “international trade and heterogeneous firms” for the New Palgrave Dictionary of Economics, 2nd Edition.

Oxford’s Alberto Behar and Ben Nelson are working to build a really rigorous trade gravity model. They combine Anderson and van Wincoop’s general equilibrium multilateral resistance approach with Helpman, Melitz, and Rubinstein’s emphasis on firm heterogeneity and the extensive margin.

We argue that one needs to take both AvW and HMR’s findings into account, otherwise interpretation of the effects of trade frictions will be misleading. We therefore unite these two strands of the literature. We derive a theoretically grounded gravity equation and then extend a method of approximating MR [multilateral resistance] terms, developed by Baier and Bergstrand (2009), to the case of firm heterogeneity…

For all our observations, traditional linear estimates bias downwards the effect of observable trade barriers on country-level trade flows. This difference, rather than the firm-level bias in the opposite direction highlighted by HMR, is arguably more relevant for policy…

Consistent with AvW’s “Implication 1”, larger countries have larger firm-level elasticities of bilateral trade in response to multilateral changes in trade costs. However we show that, once firm entry into trade is accounted for, this is no longer unambiguously true in theory for overall elasticities at the country level. Moreover, on balance we find a negative correlation in the data between country size and bilateral trade elasticities once changes in the extensive margin are accounted for.

Robert Staiger & Alan Sykes on the the theoretical relationship between exchange rate policy and international trade:

[I]t is often asserted that China’s currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner’s symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced.

Ian Ayres and Doug Kysar, law profs at Yale, apply The Theory of Moral Sentiments to carbon trading. They include this paragraph:

In addition to his famous arguments in favor of markets and liberalized trade, Smith also had a well-worked-out theory of moral behavior, one that was not so neatly separated from his economic thought as we treat it today. For example, Smith’s arguments in favor of free trade included an assumption that owners of capital would naturally prefer domestic to foreign industry, even if the latter offered higher returns. Smith thought this was a good thing because it reflected the moral sentiments that ultimately help make markets work.

What? Citation, please.

I can find no such suggestion in chapter seven of Doug Irwin’s Against the Tide, “Adam Smith’s Case for Free Trade.” I do find this quotation, which seems at odds with Ayres and Kysar’s suggestion:

Every individual is continually exerting himself to find to the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.” [Irwin p.76; Smith IV.ii.4]

Moreover, how does not pursuing the profit-maximising returns in allocating productive resources across industries or countries “help make markets work”? Smith wrote:

The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. [Irwin, p.79; Smith IV.ii.12]

If Ayres and Kysar are right about Smith, then I’d like to learn how capital’s home bias provides a public good necessary to the system of natural liberty or otherwise enhances simple-minded profit-seeking in the market. Synthesizing such a bias with Smith’s more familiar work quoted above doesn’t strike me as obvious.

Ian Ayres and Doug Kysar, law profs at Yale, apply The Theory of Moral Sentiments to carbon trading. They include this paragraph:

In addition to his famous arguments in favor of markets and liberalized trade, Smith also had a well-worked-out theory of moral behavior, one that was not so neatly separated from his economic thought as we treat it today. For example, Smith’s arguments in favor of free trade included an assumption that owners of capital would naturally prefer domestic to foreign industry, even if the latter offered higher returns. Smith thought this was a good thing because it reflected the moral sentiments that ultimately help make markets work.

What? Citation, please.

I can find no such suggestion in chapter seven of Doug Irwin’s Against the Tide, “Adam Smith’s Case for Free Trade.” I do find this quotation, which seems at odds with Ayres and Kysar’s suggestion:

Every individual is continually exerting himself to find to the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.” [Irwin p.76; Smith IV.ii.4]

Moreover, how does not pursuing the profit-maximising returns in allocating productive resources across industries or countries “help make markets work”? Smith wrote:

The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. [Irwin, p.79; Smith IV.ii.12]

If Ayres and Kysar are right about Smith, then I’d like to learn how capital’s home bias provides a public good necessary to the system of natural liberty or otherwise enhances simple-minded profit-seeking in the market. Synthesizing such a bias with Smith’s more familiar work quoted above doesn’t strike me as obvious.

Ian Ayres and Doug Kysar, law profs at Yale, apply The Theory of Moral Sentiments to carbon trading. They include this paragraph:

In addition to his famous arguments in favor of markets and liberalized trade, Smith also had a well-worked-out theory of moral behavior, one that was not so neatly separated from his economic thought as we treat it today. For example, Smith’s arguments in favor of free trade included an assumption that owners of capital would naturally prefer domestic to foreign industry, even if the latter offered higher returns. Smith thought this was a good thing because it reflected the moral sentiments that ultimately help make markets work.

What? Citation, please.

I can find no such suggestion in chapter seven of Doug Irwin’s Against the Tide, “Adam Smith’s Case for Free Trade.” I do find this quotation, which seems at odds with Ayres and Kysar’s suggestion:

Every individual is continually exerting himself to find to the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.” [Irwin p.76; Smith IV.ii.4]

Moreover, how does not pursuing the profit-maximising returns in allocating productive resources across industries or countries “help make markets work”? Smith wrote:

The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. [Irwin, p.79; Smith IV.ii.12]

If Ayres and Kysar are right about Smith, then I’d like to learn how capital’s home bias provides a public good necessary to the system of natural liberty or otherwise enhances simple-minded profit-seeking in the market. Synthesizing such a bias with Smith’s more familiar work quoted above doesn’t strike me as obvious.