Time preference and international trade

• Published date: 01 March 2021
• DOI: http://doi.org/10.1111/ijet.12291
• Date: 01 March 2021

Int J Econ Theory. 2021;17:31–45. wileyonlinelibrary.com/journal/ijet © 2020 IAET

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31

Received: 31 January 2020

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Accepted: 29 April 2020

DOI: 10.1111/ijet.12291

ORIGINAL ARTICLE

Time preference and international trade

Kazumichi Iwasa |Kazuo Nishimura

Research Institute for Economics and

Business Administration, Kobe University,

Kobe, Japan

Correspondence

Kazumichi Iwasa, Research Institute for

Economics and Business Administration,

Kobe University, 2‐1, Rokkodai‐cho,

Nada‐ku, Kobe 657‐8501, Japan.

Email: kazumichi@hi-net.zaq.ne.jp

Abstract

We first consider a closed model, where households'

time discount depends on externality in consump-

tion. We can prove that there is a unique steady

state, which is a saddle point. Then we extend

the model to a two‐country world, and derive the

condition on the effects of consumption externality

under which there is a unique free trade steady state

with saddle‐point stability.

KEYWORDS

consumption externality, Heckscher–Ohlin, time preference,

two‐country model

JEL CLASSIFICATION

E13, E21, F11, F43

1|INTRODUCTION

This paper presents a closed two‐sector model, where households' time discount depends on

externality in consumption. Then we extend it to the dynamic Heckscher–Ohlin (HO) model of

international trade.

With a constant time discount rate, the dynamic HO model yields a continuum of steady states

under free trade, and initial capital stocks in each country affect the steady‐state values of capital

stocks and the levels of welfare: an initially capital‐abundant country will be capital‐abundant in the

steady state, and vice versa. As Baxter (1992) pointed out, one problematic property of the dynamic

HO model is that the long‐run production/trade structure dramatically changes if there is a small

difference in the interest rates across countries, which easily happens when the depreciation rate on

capital or the capital tax rate in each country differs. Chen et al. (2008)resolvetheproblemby

introducing endogenous time preference from Uzawa (1968). In their model, there is a unique steady

This work was supported by the Japan Society for Promotion of Science, Grants‐in‐Aid for Research #15H05729,

#16H02016, and #16H03598.