Transaction costs and capital flows in the general equilibrium trade model
Abstract
In the dissertation we examine the implications of the existence of transaction costs on the allocation of multinational capital and on the real factor returns. We assume that in the production process the combination of labor from one country and multinational capital from the other generates transaction costs which lead to a decline in the amount of output produced. The transaction costs arise because factors of production share different cultural and social backgrounds. We use a specific-factor model with internationally mobile multinational capital in the other sector to examine the perfectly competitive solutions for the source and the host countries. Multinational firms can purchase consulting services which are provided by the host country's domestic consulting firms to mitigate the effects of transaction costs. The consulting services and the host country's "raw" labor are used to create an intermediate input, effective labor, which is employed together with multinational capital in the production of the final commodity. Since the source country is assumed to be the base for the multinational firms, the firms do not encounter transaction costs while operating inside their national boundaries. We examine how the changes in the factor endowments and the exogenous product prices affect the endogenous variables in each country when the rental rate to multinational capital is fixed. To investigate the capital flows between countries we connect them by the multinational capital market and thus endogenize the rental rate to multinational capital. Changes in one country have effects to the other country through the change in the rental rate to multinational capital. We examine the impact of the increased cultural incompatibility in cases with (i) one source country and two host countries and (ii) one host country and two source countries. In the first case the amount of multinational capital declines in the culturally incompatible host country while it increases in the other host country and source country. The owners of the domestic capital in the culturally incompatible host country benefit while labor loses. The opposite happens in the other countries. In the second case the rental rate to multinational capital from the culturally incompatible source country must decline to absorb the higher cost of production in the host country.
Degree
Ph.D.
Advisors
Pomery, Purdue University.
Subject Area
Economic theory
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