Since P=τ=αDee+zIee+zIFGee, and Dee+Iee =DIee, we solve for Dee and Iee:
DI I IFG
Dee
τI
α-zI
zIPG
α-zI
τN γ-1
τIFG
τI
θτN
τIFG

1
-IK— Γ τ~ "Iθ-1
α-z Θtn
α zI L τFGG J
and
(20)
1
τN γ-1
τ IFG
τI
θτn
τIFG

tI
α-zI
(21)
αK τ θ-1 z
α7γ τI + zIPG
α-zLθτnJα-z
I IFG I
Lemma 2: Under the assumptions of sections 3.1. and 3.3., a reduction in tariff escalation
through a decrease in the tariff on imported final good and holding the tariff on imported raw
input constant, has the following effects:
(i) total final good consumption increases, domestic final good consumed decreases, and
imported final good consumed increases;
(ii) total raw input use decreases, imported input use decreases (increases, and therefore
domestic input used increases (decreases)) if and only if the relative frequency of occurrence
between risks coming with input imported and risks coming with final good imported is higher
(lower) than the relative change in final good imported and the total input consumed.
Proof: These inequalities are obtained by using θ<1,γ>0,tInFG < tIFG and by comparing directly
Dee,Iee andDe,Ie.
(i) FGee >FGe, DFGee <DFGe, IFGee >IFGe; and
(ii) DIee < DIe, I e <Ie (and therefore Dee >De ) if and only if
z1 > IFG^e - IFGe
zιvc< DIe - DIee
IFG
><
Part (ii) of lemma 2 states a relationship between prices, demand and cost parameters and
frequency of IS occurrence for the imported input to decrease (or increase).
We are interested in a win-win situation which is a sufficient condition for welfare
17
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