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Landlocked countries and holdup! - NOITS

Landlocked countries and holdup! - NOITS

Goods YF;t i

Goods YF;t i and Y A;t i can be traded across countries. There are no transportcosts. However, the the trade of goods between upstream country and therest of the world has to go through the downstream country. This givesdownstream country an opportunity to change feed from upstream country.Final good, Y t , can be traded as well. However, as this good is the same inall countries, the motivation for trading this good only arises from its role asa mean of payment. 8Specialized goods produced in each county are i A;t and i F;t . The worldmarket clearing implies that w A;t + u A;t + d A;t = Y w A;t + Y u A;t + Y d A;t (3) w F;t + u F;t + d F;t = Y w F;t + Y u F;t + Y d F;tSpecialized goods have Cobb-Douglas production function i A;t = lA;tL i i A i 1txiA;t i F;t = l i F;tL i F it 1 xiF;t;(4)where lA;t i and li iF;t is the share of labor force, Ftand A i t is the quality oftechnology and x i F;t and xi A;t is the capital invested in good A and F sectorrespectively. Capital and labor is not mobile across countries. Specializedgoods sector is perfectly competitive andmax ilj;ti j;t wj;tl i j;tL i i p i x;j;tx i j;t st. (4) (5)for every i 2 fu; d; wg and j 2 fA; F g. The price of capital goods is denotedby p i x;j;t for j 2 fA; F g.The capital for both sectors is produced using the …nal good and depreciatesfully in one period. Both capital goods are produced by the samemonopolistic capital producer 9 (who is also and engineer or employs an engineerwith no agency problems), who uses one unit of …nal good to produceone unit of capital good in each sectormax ix i t =A;t ;xi F;tPp i x;j;tx i j;tj=A;Fx i j;t st. @pi x;j;t; (6)@x i j;t8 We implicitly assume that the …nal good can be costlessly transformed from a physicalgood into money and back. It can also be costlessly transported between downstreamcountry and the rest of the world (though it does not happen in the equilibrium weanalyze).9 The assumption of the same owner is to abstract from the straightforward e¤ect ofspecialization in a particualr good to incentives to invest in technology in that sector.6

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