Social networks and trade liberalization

Abstract

We consider a representative family in which there are location specific network effects from interactions with other family members, such as joint consumption, joint emotional support and coinsurance. The benefits an individual receives from the network they participate in are nonlinearly related to the number of family members located in urban and rural areas. Family members choose whether to locate in urban or rural areas and average and marginal network benefits differ. In a model with internationally traded urban and rural produced goods, with differential network effects in urban and rural areas free trade will no longer be the best policy. We show this through a numerical example, and suggest that the case for free trade may need to be more nuanced once social considerations of this type are taken into account.

Acknowledgements

We are grateful to EPRI, UWO and CIGI, Waterloo, for support, and Eric Ng for suggestions and comments.

Notes

¹ Amount of working time for each individual is normalized to one.