Rules of origin and welfare analysis

Abstract

We develop in this paper a model where the government is seeking to cboose an optimal rule of origin which maximizes the labor income (which measures social welfare) and solves the conflict in the productive chain by: a) assuring adequate profits for producers of inputs and final products; b) inducing technological improvement in the domestic input sector by transfering technology to this sector from the final product firm; e) guaranteeing an increase in the demand for the domestic input over time. While choosing such a rule, the government must consider that its decisión will be taken once and written in stone" from then on. That is. the selection of the rule of origin will be a one-shot, time-invariant decision.