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An Overlapping‐generations Model of Escape Clause Protection

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  • Carl Davidson
  • Steven J. Matusz

Abstract

The paper explores the efficiency consequences of using temporary protection to ease adjustment following an unexpected, permanent improvement in a country's terms of trade. In the model, workers trade off the potentially higher wage that the export sector has to offer with a lower job acquisition rate. An unexpected improvement in the terms of trade surprises old workers who cannot undo the decisions they made while young. Some old workers who had not planned to search for work in the export sector end up changing their plans, adding to the pool of searchers, creating congestion. Temporary protection can reduce congestion and make the transition to the new steady state smoother. Moreover, there are conditions under which the congestion externalities lead to multiple steady‐state equilibria that can be Pareto‐ranked. Temporary protection may lead to a permanent change in the allocation of resources, and this permanent change may be welfare‐enhancing.

Suggested Citation

  • Carl Davidson & Steven J. Matusz, 2004. "An Overlapping‐generations Model of Escape Clause Protection," Review of International Economics, Wiley Blackwell, vol. 12(5), pages 749-768, November.
    • Handle: RePEc:bla:reviec:v:12:y:2004:i:5:p:749-768
    DOI: 10.1111/j.1467-9396.2004.00480.x
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    References listed on IDEAS

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    1. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September.
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    Cited by:

    1. Falvey, Rod & Greenaway, David & Silva, Joana, 2010. "Trade liberalisation and human capital adjustment," Journal of International Economics, Elsevier, vol. 81(2), pages 230-239, July.
    2. Emily Blanchard & Gerald Willmann, 2007. "Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy," CESifo Working Paper Series 2070, CESifo.
    3. Artuc, Erhan & Lederman, Daniel & Porto, Guido, 2015. "A mapping of labor mobility costs in the developing world," Journal of International Economics, Elsevier, vol. 95(1), pages 28-41.
    4. Rod Falvey & David Greenaway & Joana Silva, 2018. "International competition, returns to skill and labour market adjustment," The World Economy, Wiley Blackwell, vol. 41(4), pages 1000-1024, April.
    5. Mazumder, Debojyoti, 2013. "Inheritance, Search Friction and International Trade: A General Equilibrium Model," MPRA Paper 55250, University Library of Munich, Germany.

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