Economies with Costly Trade Links

Economies with Costly Trade Links

We discuss a general equilibrium model of an economy with endogenous formation of costly trade links. The economy consists of a finite number of sectors and industries, and the trade links are built by similar industies from different sectors. The establishment trade links can reduce transaction costs, but inevitably incurs set-up costs. We prove that the two welfare theorems in the traditional sense apply, i.e., trade equilibria are Pareto efficient and Pareto efficient allocations can be supported by trade equilibria Furthermore, we introduce industry-wise efficiency and an industry-wise trade equilibrium concept, and clarify the relationship between the Pareto efficiency and the industry-wise efficiency concepts: Pareto efficiency implies industry-wise efficiency.