Efficient Barriers to Trade: A Sequential Trade Model with Heterogeneous Agents

Abstract

This paper studies a flexible price version of the Prescott (1975) hotels model. Unlike rigid price versions of the model, here the equilibrium outcome is efficient if potential buyers have the same downward sloping demand curve or if the probability of becoming active does not depend on their type. In the absence of these conditions the equilibrium outcome may not be efficient even in the second best (constrained) sense. I apply the analysis to discuss barriers to trade that are motivated by efficiency considerations. I show that a tariff, for example, may lead to Pareto improvement.