Showing papers in "Research in Economics in 2017"
TL;DR: In this paper, the authors present comparative global evidence on the transformation of economic growth to poverty reduction in developing countries, with emphasis on the role of income inequality, and find that on average income growth has been the major driving force behind both the declines and increases in poverty.
Abstract: The study presents comparative global evidence on the transformation of economic growth to poverty reduction in developing countries, with emphasis on the role of income inequality. The focus is on the period since the early-mid-1990s when growth in these countries as a group has been relatively strong, surpassing that of the advanced economies. Both regional and country-specific data are analyzed for the $1.25 and $2.50-level poverty headcount ratios using World Bank Povcalnet data. The study finds that on average income growth has been the major driving force behind both the declines and increases in poverty. The study, however, documents substantial regional and country differences that are masked by this ‘average’ dominant-growth story. While in the majority of countries, growth was the major factor behind falling or increasing poverty, inequality, nevertheless, played the crucial role in poverty behavior in a large number of countries. And, even in those countries where growth has been the main driver of poverty-reduction, further progress could have occurred under relatively favorable income distribution. For more efficient policymaking, therefore, idiosyncratic attributes of countries should be emphasized. In general, high initial levels of inequality limit the effectiveness of growth in reducing poverty while growing inequality increases poverty directly for a given level of growth. It would seem judicious, therefore, to accord special attention to reducing inequality in certain countries where income distribution is especially unfavorable. Unfortunately, the present study also points to the limited effects of growth and inequality-reducing policies in low-income countries.
337 citations
TL;DR: In this article, the authors compute the covariance between stock-returns and an asset-pricing factor, which depends on the decline of consumption during a depression, with a coefficient of relative risk aversion around 3.5.
Abstract: Stock-market crashes are informative about the prospects for macroeconomic depressions. Long-term data for 30 countries reveal that, conditional on a crash, the probability of a minor depression is 31 percent and of a major depression is 10 percent. The largest depressions are particularly likely to be accompanied by crashes. We allow for flexible timing between crashes and depressions to compute the covariance between stock-returns and an asset-pricing factor, which depends on the decline of consumption during a depression. With a coefficient of relative risk aversion around 3.5, this covariance accounts for the observed average (levered) equity premium of 7 percent.
156 citations
TL;DR: In this article, the authors suggest a relationship between the search costs and the severity of adverse selection in a dynamic model with asymmetric information, and propose a budget balanced mechanism to mitigate adverse selection.
Abstract: In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.
123 citations
TL;DR: This paper used highly disaggregate trade data, e.g., Gabon imports of Gambian groundnuts, to estimate the impact that new imports have had in approximately 4000 markets per country.
Abstract: Starting with Romer (1987) and Rivera-Batiz-Romer (1991) economists have been able to model how trade enhances growth through the creation and import of new varieties. In this framework, international trade increases economic output through two channels. First, trade raises productivity levels because producers gain access to new imported varieties. Second, increases in the number of varieties drives down the cost of innovation and results in ever more variety creation. Using highly disaggregate trade data, e.g. Gabon’ s imports of Gambian groundnuts, we structurally estimate the impact that new imports have had in approximately 4000 markets per country. We then move from groundnuts to globalization by building an exact TFP index that aggregates these micro gains to obtain an estimate of trade on productivity growth for each country. We find that in the typical country in the world, new imported varieties account for 10–25% of its productivity growth. However, when we structurally estimate the long-run impacts of these productivity growth effects, we find that import variety growth between 1994 and 2003 raised world permanent income by 17% .
110 citations
TL;DR: In this paper, a large sample of entrepreneurs, 2D:4D (second-to-fourth digit) ratio and managerial performance were studied and it was found that entrepreneurial ability has a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability.
Abstract: In a large sample of entrepreneurs, 2D:4D (second-to-fourth digit) ratio and managerial performance are studied. Entrepreneurs with lower ratio manage larger firms, manage larger firms when acquire control and experience faster average growth. Firms run by high prenatal testosterone entrepreneurs have lower profitability as measured by return on assets and return on sales. Prenatal testosterone is correlated with elicited measures of entrepreneurial skills, like work effort and optimism and the latter are correlated with firm size. This evidence suggests entrepreneurial ability has a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability.
43 citations
TL;DR: Auerbach et al. as mentioned in this paper used real-time forecast data to purge policy innovations of their predictable components and estimate government purchase multipliers for Japan, following the approach used previously for a panel of OECD countries.
Abstract: In this paper, we estimate government purchase multipliers for Japan, following the approach used previously for a panel of OECD countries (Auerbach and Gorodnichenko, 2013). This approach allows multipliers to vary smoothly according to the state of the economy and uses real-time forecast data to purge policy innovations of their predictable components. For a sample period extending from 1960 to 2012, estimates for Japan are quite consistent with those previously estimated for the OECD as well as those estimated using a slightly different methodology for the United States (Auerbach and Gorodnichenko, 2012). However, estimates based only on more recent observations are less stable and provide weaker support for the effectiveness of government purchases at stimulating economic activity, particularly in recession, although cyclical patterns in Japan make the dating of recessions a challenge.
42 citations
TL;DR: In this article, the authors studied the interactions between access to finance, product innovation, and labor supply in a two-period overlapping generations model with an endogenous skill distribution and credit market frictions.
Abstract: This paper studies interactions between access to finance, product innovation, and labor supply in a two-period overlapping generations model with an endogenous skill distribution and credit market frictions. In the model lack of access to finance (induced by high monitoring costs) has an adverse effect on innovation activity not only directly but also indirectly, because too few individuals may choose to invest in skills. If monitoring costs fall with the number of successful projects, multiple equilibria may emerge, one of which, a middle-income trap, characterized by low wages in the design sector, a low share of the labor force engaged in innovation activity, and low growth. A sufficiently ambitious policy aimed at alleviating constraints on access to finance by innovators may allow a country to move away from such a trap by promoting the production of ideas and improving incentives to invest in skills.
40 citations
TL;DR: The authors argue that the Federal Reserve can improve communication in the current environment by moving away from time-based forward guidance, clarifying how interest rates are likely to change given new information, and providing more information in the Summary of Economic Projections, and argue that, except under unusual circumstances, this is an imprudent strategy as it mutes the effect of macroeconomic news on interest rates and unnecessarily places restrictions on future Federal Reserve action when new information arrives.
Abstract: This paper examines the Federal Reserve's communication strategy to see how well it has worked and how it can be improved. It argues that Federal Reserve communication when short-term interest rates are no longer constrained by the zero lower bound should be focused on relaying a data-based reaction function which informs market participants how interest rates will adjust as new information arrives. Instead, the Federal Reserve in recent years has relied more heavily than desired on “time-based” forward guidance, focusing on when interest rates are likely to rise rather than under what circumstances. We argue that, except under unusual circumstances, this is an imprudent strategy, as it mutes the effect of macroeconomic news on interest rates and unnecessarily places restrictions on future Federal Reserve action when new information arrives. We argue that the Federal Reserve can improve communication in the current environment by moving away from time-based forward guidance, clarifying how interest rates are likely to change given new information, and providing more information in the Summary of Economic Projections.
37 citations
TL;DR: In this paper, the conceptually useful allegory of a futuristic "World Climate Assembly" that votes on global carbon emissions via the basic principle of majority rule is proposed, and two variants are considered: one is to vote on a universal price that is internationally harmonized, but the proceeds from which are domestically retained.
Abstract: This paper posits the conceptually useful allegory of a futuristic “World Climate Assembly” that votes on global carbon emissions via the basic principle of majority rule. Two variants are considered. One is to vote on a universal price (or tax) that is internationally harmonized, but the proceeds from which are domestically retained. The other is to vote on the overall quantity of total worldwide emissions, which are then distributed for free (via a pre-decided fractional subdivision formula) as individual allowance permits that are subsequently marketed in an international cap-and-trade system. The model of the paper suggests that the majority-voted price is likely to be less distortionary and easier to enact than the majority-voted total quantity of permits. Some possible implications for climate-change negotiations are noted.
35 citations
TL;DR: In this article, the authors document evidence of the growth of the joint purchase of electric and hybrid vehicles and solar panels, and discuss pricing and quality trends for these green durable goods.
Abstract: Rising greenhouse gas emissions raise the risk of severe climate change. The household sector׳s greenhouse gas emissions have increased over time as more people drive gasoline cars and consume electricity generated using coal and natural gas. The household sector׳s emissions would decline if more households drove electric vehicles and owned solar panels. In recent years automobile manufacturers have been producing high-performance electric vehicles, and solar panels are becoming more efficient and less expensive. Using several data sets from California, we document evidence of the growth of the joint purchase of electric and hybrid vehicles and solar panels. We discuss pricing and quality trends for these green durable goods.
34 citations
TL;DR: In this article, the authors investigated the relationship between trade liberalization, financial modernization and economic development for 14 countries in the Asia and Pacific region over the period spanning from 1961 to 2011, using panel data as they have many advantages over cross-sectional or time series data.
Abstract: This study investigates the relationship between trade liberalization, financial modernization and economic development for 14 countries in the Asia and Pacific region over the period spanning from 1961 to 2011. The study uses panel data as they have many advantages over cross-sectional or time series data. In addition to analyzing the full panel, we also divide the 14 countries under study into two sub-samples: high-income countries and middle-income countries, based on World Bank's income classification as of 1st July 2013. The panel cointegration tests show a long run relationship between the above variables. The study uses Feasible Generalized Least Squares (FGLS) method to estimate the models and then conducts Granger causality tests to identify patterns of causation among the variables of interest. In general, the results indicate unidirectional causality (1) from financial modernization to economic development for the entire panel and the panel of middle-income countries; (2) from trade liberalization to economic development for the whole panel as well as two subpanels of high-income and middle-income countries; and (3) from trade liberalization to financial modernization for the whole panel as well as two subpanels. The findings of this study support that the actual effect of financial depth on economic development (and vice versa) seems to depend on the level of financial development.
TL;DR: In this article, the authors introduce geoengineering into a simple analytical model of climate change and model the technical and economic characteristics of geoengineering in line with the recent literature from physical and environmental management sciences, investigating under which circumstances geoengineering can substitute, partly or completely, for traditional abatement strategies, under which conditions and at what level geoengineering is optimally employed.
Abstract: Technically simple measures to directly reduce mean global temperatures could be available in the near future. We introduce “geoengineering” into a simple analytical model of climate change. We model the technical and economic characteristics of geoengineering in line with the recent literature from physical and environmental management sciences. We investigate: (i) under which circumstances geoengineering can substitute, partly or completely, for traditional abatement strategies, (ii) under which conditions and at what level geoengineering is optimally employed, and (iii) whether geoengineering can mitigate free-riding problems.
TL;DR: This paper measured the distribution of firms' financial soundness over most of the last century for a broad cross-section of firms and highlighted three main findings for this key aggregate state variable.
Abstract: We measure the distribution of firms’ financial soundness over most of the last century for a broad cross section of firms. We highlight three main findings for this key aggregate state variable. First, the three worst recessions between 1926 and 2012 coincided with sharp deteriorations in the financial soundness of all firms, but other recessions did not. Second, fluctuations in total asset volatility, rather than fluctuations in leverage, appear to drive most of the variation in the distribution of firms’ financial soundness. Finally, the distribution of financial soundness for large financial firms 1962–2007 largely resembles that for large nonfinancial firms.
TL;DR: In this paper, the authors study the information preferences and information demand of decision-makers facing uncertainty and provide necessary and sufficient conditions for decision makers with different classes of payoff functions to prefer one information structure to another.
Abstract: We study the information preferences and information demand of decision-makers facing uncertainty. We focus on monotone decision problems in which the posterior beliefs induced by the decision-maker’s information can be ordered so that higher actions are chosen in response to higher signal realizations. We provide necessary and sufficient conditions for decision makers with different classes of payoff functions to prefer one information structure to another. We also provide conditions under which two decision-makers in a given class can be ranked in terms of their information demand. Applications and examples are given.
TL;DR: In this article, the authors provide a model where a typical public good requires different inputs which raises the possibility of partnerships to exploit comparative advantages of different parties, but hold-up problems due to contractual incompleteness in specifying tasks discourage separation of ownership and management.
Abstract: When will a public good or service be provided by the government, when will it be provided by a NGO, and when will we see a private–public partnership? This paper provides a model where a typical public good requires different inputs which raises the possibility of partnerships to exploit comparative advantages of different parties. But hold-up problems due to contractual incompleteness in specifying tasks discourage separation of ownership and management. The fact that public goods have the property of non-rivalry and non-excludability and that NGOs tend to be non-profits drives our key results. We apply the framework to NGOs in developing countries which, in the last few decades, have been increasingly involved in various capacities in the provision of a wide range of public goods and services.
TL;DR: In this article, the authors derive the condition under which NGDP targeting would dominate other regimes such as annual IT, to achieve objectives of output and price stability, and conclude that the condition may indeed hold.
Abstract: Interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. Developing countries are better suited for it, however, in light of big supply shocks and terms of trade shocks, such as monsoon rains and oil import price shocks in the case of India. Under annual inflation targeting (IT), the full impact of adverse supply shocks is felt as lost real GDP. NGDP targeting automatically accommodates such shocks, while retaining the advantage of anchoring expectations. We derive the condition under which NGDP targeting would dominate other regimes such as annual IT, to achieve objectives of output and price stability. We estimate key parameters for the case of India and conclude that the condition may indeed hold.
TL;DR: The authors examined the effect of externalities on firm-level productivity and wages in manufacturing and found that agglomeration externalities occur through both productivity and wage effects, and that large firms facing no local competition have higher revenues and pay lower wages.
Abstract: Using detailed census data from Morocco, this paper investigates the existence of local externalities in manufacturing. In contrast to many other studies that focus on aggregate employment growth, we examine the effect of externalities on firm-level productivity and wages. Our empirical results show that agglomeration externalities occur through both productivity and wage effects. Returns to specialization are strong and large in magnitude. In accordance with the views of Marshall, Arrow and Romer, the net effect of competition on productivity and wages tends to be negative. Large firms facing no local competition have higher revenues and pay lower wages. We also find some limited evidence in favor of the diversity argument put forth by Jacobs.
TL;DR: The authors reevaluate Farrell and Rabin's assumptions on how players use language and their conclusions on the limits of communication in bringing about coordination in the Battle of the Sexes, and suggest that their agreement do not reflect a full meeting of the minds.
Abstract: This paper reconsiders Farrell׳s (1987) and Rabin׳s (1994) analyses of coordination via preplay communication, focusing on Farrell׳s analysis of Battle of the Sexes. Replacing their equilibrium and rationalizability assumptions with a structural non-equilibrium model based on level-k thinking, I reevaluate Farrell and Rabin׳s assumptions on how players use language and their conclusions on the limits of communication in bringing about coordination. The analysis partly supports their assumptions about how players use language, but suggests that their “agreements” do not reflect a full meeting of the minds. A level-k analysis also yields very different conclusions about the effectiveness of communication.
TL;DR: In this article, the authors show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector.
Abstract: After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium is largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
TL;DR: The authors study the impact of the rise in female labor supply on the economic performance of the United States over the period 1967-2002 through the lens of a calibrated structural model, and conclude that half of the growth in US earnings per capita over this period can be traced to growth in female labour supply.
Abstract: We study the impact of the rise in female labor supply on the economic performance of the United States over the period 1967–2002 through the lens of a calibrated structural model. The model features all the key forces behind the increase in female participation (the “Quiet Revolution”): (1) the decline in marriage rates, (2) the narrowing gender wage gap, (3) the preference (or cultural) shift towards market work, and (4) the change in women’s bargaining power within the household. We find that preference shifts and the rise in relative wages of women were the most important driving forces behind rising women’s participation, while changes in marriage patterns have also had a sizeable effect. We conclude that half of the growth in US earnings per capita over this period can be traced to growth in female labor supply. We also find that the rise in female labor supply has had offsetting effects on income inequality and, therefore, its overall role has been negligible relative to skill-biased demand shifts and rising residual wage volatility.
TL;DR: The authors designed a peer tutoring program that matches high-performing students as tutors to their low-performing classmates and provides non-monetary incentives for them to study together and improve the pair's academic performance.
Abstract: Peer tutoring is a well-known type of peer-assisted learning, which has proven to be a cost-effective intervention. We designed a peer tutoring program that matches high-performing students as tutors to their low-performing classmates and provides non-monetary incentives for them to study together and improve the pair’s academic performance. We implemented the program and tested the effects in rural Chinese middle schools. The program significantly improved the tutors’ math scores and produced other benefits regarding study attitude and social behaviors. However, the program did not improve the tutees’ math scores and instead augmented their learning stress. The most compelling explanation is that the set-up of the program brought to light the tutees’ standing, by design, in the bottom half of their class.
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TL;DR: In this paper, the authors provide definitions of authority in a variety of problems and investigate how and when individuals can have, gain, and lose authority, and investigate when and how individuals can gain or lose authority.
Abstract: A law prohibiting a particular behavior does not directly change the payoff to an individual should he engage in the prohibited behavior. Rather, any change in the individual׳s payoff, should he engage in the prohibited behavior, is a consequence of changes in other peoples׳ behavior. If laws do not directly change payoffs, they are “cheap talk,” and can only affect behavior because people have coordinated beliefs about the effects of the law. Beginning from this point of view, we provide definitions of authority in a variety of problems, and investigate how and when individuals can have, gain, and lose authority.
TL;DR: In this paper, the authors proposed a theoretical framework for studying the effects of geographical factors on the distribution of industries across many regions and summarized the geographical feature of each region by a proximity matrix, whose elements measure the closeness between every pair of regions and depend on the parameters representing the transport and other costs of using a variety of trade routes.
Abstract: I propose a theoretical framework for studying the effects of geographical factors on the distribution of industries across many regions. The geographical feature of each region is summarized by a proximity matrix, whose elements measure the closeness between every pair of regions and depend on the parameters representing the transport and other costs of using a variety of trade routes. A change in these costs of trade affects the distribution of industries by amplifying the geographical advantages and disadvantages of regions. Through a series of examples, I demonstrate how this framework can be used not only to examine the effects of an improvement in transport infrastructure, but also to address some problems from economic history, regional economic integration, and the north-south division, and discuss some geopolitical issues.
TL;DR: In this article, the authors initiated a research program to explore how much and how much collusion is involved in collusion in the context of mutual beliefs, and the legal focus on mutual beliefs.
Abstract: Unlawful collusion is when …rms have a mutual understanding to coordinate their behavior for the purpose of achieving a supracompetitive outcome. Given the legal focus on mutual beliefs, this paper initiates a research program to explore how much and
TL;DR: This article evaluated the Reggio Approach using non-experimental data on individuals belonging to one of five age cohorts: ages 50, 40, 30, 18, and 6 as of 2012, and found that it significantly boosts outcomes related to employment, socio-emotional skills, high school graduation, election participation, and obesity.
Abstract: We evaluate the Reggio Approach using non-experimental data on individuals from the cities of Reggio Emilia, Parma and Padova belonging to one of five age cohorts: ages 50, 40, 30, 18, and 6 as of 2012. The treated were exposed to municipally offered infant-toddler (ages 0-3) and preschool (ages 3-6) programs. The control group either did not receive formal childcare or were exposed to programs offered by the state or religious systems. We exploit the city-cohort structure of the data to estimate treatment effects using three strategies: difference-in-differences, matching, and matched-difference-in-differences. Most positive and significant effects are generated from comparisons of the treated with individuals who did not receive formal childcare. Relative to not receiving formal care, the Reggio Approach significantly boosts outcomes related to employment, socio-emotional skills, high school graduation, election participation, and obesity. Comparisons with individuals exposed to alternative forms of childcare do not yield strong patterns of positive and significant effects. This suggests that differences between the Reggio Approach and other alternatives are not sufficiently large to result in significant differences in outcomes. This interpretation is supported by our survey, which documents increasing similarities in the administrative and pedagogical practices of childcare systems in the three cities over time.
TL;DR: This article found that those who play video games are typically better educated and no less wealthier, and games players are also more likely than non-games players to participate in other forms of culture, particularly active forms of participation.
Abstract: This study addresses the important and recurring question of whether playing video games is detrimental to the socio-economic development of a person. It does this by using novel data from the Taking Part Survey in England to establish whether games playing is associated with particular socio-economic characteristics and/or other forms of cultural participation. The results do not indicate any obviously negative effects of video games playing: rather, those who play are typically better educated and no less wealthier, and games players are also more likely than non-games players to participate in other forms of culture, particularly active forms of participation. These findings are reinforced when comparing the characteristics of individuals who did and did not play video games when younger.
TL;DR: In this article, the authors studied the optimal prevention and cure when an agent copes with two different sources of uncertainty: uncertainty on disease effect and uncertainty on cure effectiveness, and characterized for each source of uncertainty the conditions for the optimal level of cure to increase.
Abstract: This paper studies optimal prevention and cure when an agent copes with two different sources of uncertainty: uncertainty on disease effect and uncertainty on cure effectiveness. We first analyze how optimal choices are affected by uncertainty when prevention and cure do not interact. Under both types of uncertainty, we obtain that the optimal level of prevention rises. Furthermore, we characterize for each source of uncertainty the conditions for the optimal level of cure to increase. We show that these conditions are related to different measures of prudence in health and cross-prudence in wealth. Lastly, we generalize our results to the case where prevention and cure interact and characterize for each source of uncertainty the conditions for the optimal level of prevention and cure to jointly increase. These conditions are similar to those obtained in the case without uncertainty but, in this context, Edgeworth–Pareto complementarity is also required.
TL;DR: In this paper, the authors introduced a cost of location into Hotelling's (1929) spatial duopoly model and derived the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists.
Abstract: We introduce a cost of location into Hotelling׳s (1929) [9] spatial duopoly model. We derive the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists. With linear transportation cost and a suitably specified cost of location that rises toward the center of the Hotelling line, symmetric equilibrium locations are in the outer quartiles of the line, ensuring the existence of pure strategy equilibrium prices. With quadratic transportation cost and a suitably specified cost of location that falls toward the center of the line, symmetric equilibrium locations range from the center to the end of the line.
TL;DR: In this paper, the authors study monopolistic competition with symmetric directly additive preferences (generating variable mark-ups) and an endogenous technology choice, and prove that the equilibrium R&D investment increases with market size (a larger population or trade) only if the price-elasticity of demand is an increasing function.
Abstract: We study monopolistic competition with symmetric directly additive preferences (generating variable mark-ups) and an endogenous technology choice. Each firm chooses an investment in R&D to decrease its marginal cost. We prove that the equilibrium R&D investment increases with market size (a larger population or trade) only if the price-elasticity of demand is an increasing function. Together with the output levels, such equilibrium investments may be socially excessive or insufficient , depending on whether the elasticity of the subutility is increasing or decreasing. The main implication is that opening up to free trade can foster R&D through variable mark-ups.
TL;DR: In this article, the authors introduce a class of "increasing elasticity of substitution" preferences in a monopolistic competition setting and find that a market which is widening, as a result of international trade, increases price-cost margins and reduces firm sizes.
Abstract: A bstract We introduce a class of “increasing elasticity of substitution” preferences in a monopolistic competition setting a la Dixit and Stiglitz (1977). Contrary to the standard view, we find that a market which is widening, as a result of, for example, international trade, increases price-cost margins and reduces firm sizes. However, even if prices are higher (with constant marginal costs), consumers benefit from the market expansion because of higher product diversity (the free-entry equilibrium has a sub-optimal number of varieties). Our results might contribute to explain the puzzle posed by the movements of markups following globalisation. They could also help explaining the cyclical behaviour of prices.