THE EFFECT OF THE ARAB BOYCOTT ON ISRAEL: THE AUTOMOBILE MARKET Chaim Fershtman and Neil Gandal Eitan Berglas School of Economics Tel Aviv University e-mail correspondence: November 27, 1995

Abstract Recent progress towards a comprehensive peace in the Middle East has led to a relaxation of the enforcement of the Arab economic boycott of Israel. This in turn has led to the entry of all the major Japanese and Korean automobile manufacturers into the Israeli market. In this paper, we examine the effect of the Arab economic boycott on this market. Using recent advances in estimating discrete-choice models of product differentiation, we estimate that had the boycott continued, the welfare loss per purchaser would have been approximately $790 in 1994. This benefit can be interpreted as a peace dividend. Since approximately 113,000 new automobiles were sold in 1994, the welfare gain to consumers was more than $89 million that year. Keywords: Economic Sanctions, Boycott JEL Classification Numbers: D6, F1, L62 We are grateful to the Pinhas Sapir Center for Development for financial support and to Sarit Markovich for outstanding research assistance. We thank seminar participants at the University of Maryland, the University of Michigan, Stanford University, and Tel Aviv University for helpful comments and also thank Steve Berry, Jim Levinsohn, and Ariel Pakes for provision of data on product characteristics of automobiles sold in the U.S.


1 Introduction
The Arab economic boycott of Israel is probably one of the most enduring and comprehensive cases of the use of economic sanctions.1,2 In 1922, the Fifth Palestine Arab Congress passed a resolution calling on Arabs to boycott Jewish businesses in Palestine. The boycott was institutionalized with the establishment of the Arab League in 1945. Following the establishment of Israel, the Arab League banned all commercial and financial transactions between Israel and the Arab states. In 1951, the Arab...