Willingness to Pay in CGE Models

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Working Paper 004: Willingness to Pay in CGE Models

By Terrie Walmsley and Peter Minor
Publishing Date: December 2015

Abstract

The aim of this paper is to provide a new methodological approach for estimating the economic impacts of reducing customs delays within a computable general equilibrium (CGE) model. The new approach, which we will reference as the willingness-to-pay method, explicitly models the reduction in customs delays from the demand side, as an increase in a consumer’s willingness to pay for faster delivery. To illustrate our new approach, we estimate the impact of the WTO Trade Facilitation Agreement (TFA). Estimates of willingness to pay for the reduction in customs delays are estimated econometrically to obtain ad valorem equivalents of the TFA. These are then applied as a demand side shocks to a global supply chain model and the results compared with the existing methodology, based on Samuelson’s iceberg approach (Samuelson, 1954). The iceberg approach raises the quantity of imports received relative to those exported through an import-augmenting technological change, thereby raising real GDP. The new approach reduces the impact of the TFA on real GDP, although production, prices, trade volumes and welfare are all higher when the TFA is explicitly modeled as a demand or preference shift in consumers’ willingness to pay.

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