School of Economic Sciences - Washington State University

diversionary impact of missions. Lemma 1 also says missions are more effective if firms are morehomegenous (γ is large), but less effective if goods are more substitutable (σ is large).Trade missions increase state exports. Lemma 2 says they increase state profit also.Lemma 2. State profit as a function of trade missions,Π s (M i,1 , M i,2 , ..., M i,J ) = σ − 1σγis increasing in M ij .J∑j=1= σ − 1σγ z−ab( ) γ (θj1abµL i Y j (w i f ij ) −a × ij)w i τ ij z MJ∑j=1˜X ij × M abij ,Trade missions increase state profits through their effect on exports, though the increase inprofits is less than the increase in exports. The government faces a tradeoff: trade missions andincreased state profit versus the expense of higher labor taxes reducing state disposable income.Given the strategies of consumers, firms, and other governments, a governor chooses t ∗ i and {M ij ∗ }J j=1to solvemax(1 − t i )w i N i + Π i (M i1 , ..., M iJ ) such that t i w i N i ≥ G i and t i ≥ 0, M ij ≥ z. (6)Theorem. An equilibrium exists in which trade mission intensity from i to j is given by{ γ − (σ − 1)M ij = maxγ{ γ − (σ − 1)= maxγ(µ θjL i Y jσd i g j}1Xij ˜ , zσd i g j) γ }(w i f ij ) −a , zw i τ ijIn order for an equilibrium to exist, parameters must satisfy 0