smuggling, illegal exports, risk aversion, illegal imports
Extending the seminal work of Bhagwati and Hansen (1973) on smuggling, Pitt (1981) developed a new approach to investigate the welfare effect of smuggling. This paper develops an extension of Pitt's original model which allows many of the interesting features of the Bhagwati and Hansen model to be revaluated within a joint product model of smuggling framework. The extension is made through the following modifications to Pitt's assumptions: 1) firms that export are free to engage in joint product smuggling or strictly legal trade; and 2) uncertainty is introduced into the model via active government enforcement. The modifications enable the model to reexamine the ambiguous welfare results derived in the papers by Pitt, and Bhagwati and Hansen. The model explains why the ambiguous welfare results were derived and demonstrates that the welfare effect of smuggling can indeed be positive, even if smuggling incurs a real resource cost.
Department of Economics, South Dakota State University
Number of Pages
Fausti, Scott, "The Effect of Uncertainty on a Joint Product Model of Smuggling" (1992). Economics Staff Paper Series. 89.