Trade and Geography

March 30, 2017
Stephen J. Redding and Esteban Rossi-Hansberg, both of Princeton University, Organizers

Emi Nakamura and Jón Steinsson, Columbia University and NBER, and Jósef Sigurdsson, IIES, Stockholm University

The Gift of Moving: Intergenerational Consequences of a Mobility Shock (NBER Working Paper No. 22392)

Nakamura, Sigurdsson, and Steinsson exploit a volcanic “experiment" to study the costs and benefits of geographic mobility. They show that moving costs (broadly defined) are very large and labor therefore does not flow to locations where it earns the highest returns. In the researchers' experiment, a third of the houses in a town were covered by lava. People living in these houses where much more likely to move away permanently. For those younger than 25 years old who were induced to move, the "lava shock" dramatically raised lifetime earnings and education. Yet, the benefits of moving were very unequally distributed within the family: Those older than 25 (the parents) were made slightly worse off by the shock. The town affected by the volcanic experiment was (and is) a relatively high income town. The researchers interpret their findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.

Pablo Fajgelbaum, University of California, Los Angeles and NBER, and Edouard Schaal, New York University

Optimal Transport Networks in Spatial Equilibrium (NBER Working Paper No. 23200)

Fajgelbaum and Schaal study optimal transport networks in spatial equilibrium. They develop a framework consisting of a neoclassical trade model with labor mobility in which locations are arranged on a graph. Goods must be shipped through linked locations, and transport costs depend on congestion and on the infrastructure in each link, giving rise to an optimal transport problem in general equilibrium. The optimal transport network is the solution to a social planner's problem of building infrastructure in each link. The researchers provide conditions such that this problem is globally convex, guaranteeing its numerical tractability. They also study cases with increasing returns to transport technologies in which global convexity fails. They apply the framework to assess optimal investments and inefficiencies in observed road networks in 25 European countries. The counterfactuals suggest larger gains from road network expansion and larger losses from misallocation of current roads in lower-income countries.

Enghin Atalay and Mary Jialin Li, University of Chicago, and Ali Hortaçsu and Chad Syverson, University of Chicago and NBER

How Wide Is the Firm Border?

Atalay, Hortaçsu, Li, and Syverson quantify the transaction costs that firms face when participating in intermediate goods markets. To do so, they examine the shipment behavior of tens of thousands of establishments that produce and distribute a variety of products throughout the goodsproducing sector. Their main analysis relates the frequency of shipments across pairs of sending establishments and destination zip codes to the proportion of establishments in the destination which share ownership with the sender. These regressions reveal that the firm boundary is notably wide: An additional downstream establishment which shares ownership with the sender has an equivalent effect on trade intensity as a 30 percent reduction in distance between sender and destination. A calibration of a multi-sector general equilibrium trade model demonstrates that these transaction costs also have discernible economy-wide implications.

Melanie Morten, Stanford University and NBER, and Jaqueline Oliveira, Rhodes College

The Effects of Roads on Migration and Trade: Evidence from a Planned Capital City

A large body of literature studies how infrastructure facilitates the movement of traded goods. Morten and Oliveira ask whether infrastructure also facilitates the movement of labor. The researchers use a general equilibrium trade model and rich spatial data to explore the impact of a large plausibly exogenous shock to highways in Brazil on both goods markets and labor markets. They find that the road improvement increased welfare by 10.8%, of which 91% was due to reduced trade costs and 9% to reduced migration costs. Nevertheless, costly migration is responsible for large spatial heterogeneity in the benefits of roads: the interquartile range of welfare improvement is 5%-29%, as opposed to uniform gains with perfect mobility.

David Lagakos, University of California, San Diego and NBER; Ahmed Mushfiq Mobarak, Yale University and NBER; and Michael E. Waugh, New York University and NBER

The Welfare Effects of Encouraging Rural-Urban Migration

This paper studies the welfare effects of encouraging rural-urban migration in the developing world. To do so, Lagakos, Mobarak, and Waugh build a dynamic incomplete-markets model of migration in which heterogeneous agents face seasonal income fluctuations, stochastic income shocks, and disutility of migration that depends on past migration experience. They calibrate the model to replicate a field experiment of subsidized migration in rural Bangladesh, leading to significant increases in both migration rates and in consumption for induced migrants. The model's welfare predictions for migration subsidies are driven by two main features of the model and data: first, induced migrants tend to be negatively selected on income and assets; second, the model's non-monetary disutility of migration is substantial, which the researchers validate using using newly collected survey data from this same experimental sample. The average welfare gains are similar in magnitude to those obtained from an unconditional cash transfer, though migration subsidies lead to larger gains for the poorest households, which have the greatest propensity to migrate.

Ariel Burstein, University of California, Los Angeles and NBER; Gordon Hanson, University of California, San Diego and NBER; Lin Tian, Columbia University; and Jonathan Vogel, Columbia University and NBER

Immigration, Occupations, and Local Labor Markets: Theory and Evidence from the U.S.

In this paper, Burstein, Hanson, Tian, and Vogel show that labor-market adjustment to immigration differs across tradable and nontradable occupations. Theoretically, the researchers derive a simple condition under which the arrival of foreign-born labor crowds native-born workers out of (or into) immigrant-intensive jobs, thus lowering (or raising) relative wages in these occupations, and explain why this process differs within tradable versus within nontradable activities. Using data for U.S. commuting zones over the period 1980 to 2012, the researchers find that consistent with their theory, a local influx of immigrants crowds out employment of native-born workers in more relative to less immigrant-intensive nontradable jobs, but has no such effect within tradable occupations. Further analysis of occupation wage bills is consistent with adjustment to immigration within tradables occurring more through changes in output (versus changes in prices) when compared to adjustment within nontradables, thus confirming the theoretical mechanism behind differential crowding out between the two sets of jobs. The researchers then build on these insights to construct a quantitative framework to evaluate the consequences of counterfactual changes in U.S. immigration. Reducing inflows from Latin America, which tends to send low-skilled immigrants to specific U.S. regions, raises local wages for native-born workers in more relative to less-exposed nontradable occupations by much more than for similarly differentially exposed tradable jobs. By contrast, increasing the inflow of high-skilled immigrants, who are not so concentrated geographically, causes tradables and nontradables to adjust in a more similar fashion. For the nontradable-tradable distinction in labor-market adjustment to be manifest, as the researchers find to be the case in their empirical analysis, regional economies must vary in their exposure to an immigration shock.

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