Knowledge that Transforms

Differences in property rights create a motive for trade among otherwise identical regions. Two regions with identical technologies, endowments, and preferences will trade if one, the South, has ill-defined property rights on environmental resources. Trade with a region with well-defined property rights transmits and enlarges the problem of the commons: the North overconsumes underpriced resource-intensive products imported from the South. This occurs even though trade equalizes all prices, of goods and factors, worldwide. Taxing the use of resources in the South is unreliable as it can lead to more overextraction. Property-rights policies may be more effective.

We develop an ordinal approach to comparing the equilibria of economic models. Its main advantages over the traditional approach based on signing derivatives are that (i) it utilizes only a subset of the assumptions, resulting in a simpler theory that facilitates focusing attention on the economics rather than the mathematics, (ii) it applies to discrete changes, even when there are multiple equilibria and when some equilibria do not vary smoothly with the parameters, and (iii) it incorporates a formal theory of the robustness of conclusions to assumptions, which helps modelers distinguish which assumptions are "critical" to their comparative-statics conclusions.