Reference Point Dependence for Specification Bias from Quality Upgrading / Eric Hutton, John Whalley.

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Hutton, Eric

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4816.Publication details: Cambridge, Mass. National Bureau of Economic Research 1994.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: This paper argues that whether estimates of the welfare cost of natural or artificial trade barriers that do not discriminate by quality are subject to positive or negative specification bias when using models which do not explicitly recognize quality variation depends on the reference point used in counterfactual equilibrium analysis. We use numerical general equilibrium techniques to generate counter examples to the widely held view that (in the competitive case) incorporating quality upgrading will tend to reduce the welfare costs of quality invariant trade barriers. To do this, we use a trade-distorted equilibrium as the reference point, rather than free trade.

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Previous	nber w4813 Retirement Research Using the Health and Retirement Survey /	nber w4814 The Macroeconomics of the Great Depression: A Comparative Approach /	nber w4815 Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty /	nber w4816 Reference Point Dependence for Specification Bias from Quality Upgrading /	nber w4817 Intermediate Goods and Business Cycles: Implications for Productivity and Welfare /	nber w4818 The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective /	nber w4819 Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis /	Next

August 1994.

This paper argues that whether estimates of the welfare cost of natural or artificial trade barriers that do not discriminate by quality are subject to positive or negative specification bias when using models which do not explicitly recognize quality variation depends on the reference point used in counterfactual equilibrium analysis. We use numerical general equilibrium techniques to generate counter examples to the widely held view that (in the competitive case) incorporating quality upgrading will tend to reduce the welfare costs of quality invariant trade barriers. To do this, we use a trade-distorted equilibrium as the reference point, rather than free trade.