J. Demelo et D. Tarr, VERS UNDER IMPERFECT COMPETITION AND FOREIGN DIRECT-INVESTMENT - A CASE-STUDY OF THE US-JAPAN AUTO VER, Japan and the world economy, 8(1), 1996, pp. 11-33
This paper first assesses the costs of the US-Japan auto VER in a gene
ral equilibrium constant returns to scale (CRTS) model at about $10 bi
llion. It then sequentially introduces important features of the auto
VER: endogenous rent premium determination, wage distortions in autos,
the US capturing some of the rents of the VER, US monopsony power in
autos, increasing returns to scale, pure profits and entry, foreign di
rect investment, and endogenous conjectures. In the preferred monopoli
stic competition, initial profit model, the estimated costs are about
10% less than under the assumption of CRTS, but costs remain high at o
ver $200 000 per job protected in autos. Compared with exogenous rent
determination, endogenous rent determination results in significantly
lower estimated costs of the VER because domestic entry reduces the re
nt premium, Foreign direct investment with initial profits is shown to
lower the costs of the VER if, and only if, the rent premium is endog
enous.