International Trade and Investment

December 5-6, 2014
Gordon Hanson, University of California, San Diego, Organizer

Donald Davis, Columbia University and NBER; Jonathan Dingel, University of Chicago; Joan Monras, Sciences Po; and Eduardo Morales, Princeton University and NBER

Spatial and Social Frictions in the City: Evidence from Yelp

Davis, Dingel, Monras, and Morales employ user-generated data from the social website Yelp to estimate how spatial and social frictions combine to shape consumption choices within cities. Travel time matters for consumption choices, more strongly from work than home. Social frictions also play a large role. Individuals are less likely to visit venues in places demographically different from their own neighborhood. Crime shapes the consumption choices across space differently for men and women. Women, but not men, avoid high-crime areas. The researchers use their estimates to gauge how much greater these frictions would be if crime were at recent historical peaks and to show how transportation projects would alter the consumption value of a city.

Treb Allen, Northwestern University and NBER; Costas Arkolakis, Yale University and NBER; and Yuta Takahashi, Northwestern University

Universal Gravity

The gravity relationship is one of the most robust empirical results in economics. This success has led to a proliferation of general equilibrium models that offer theoretical foundations for the gravity relationship. In this paper, Allen, Arkolakis, and Takahashi develop a universal framework that nests previous general equilibrium gravity models and show that many of the macro-economic implications these various models depend solely on two key model parameters, which they term the "gravity constants." On the theoretical side, the researchers provide sufficient conditions for the existence and uniqueness of the trade equilibrium and show that the equilibrium can be equivalently considered as the solution to planning problems either maximizing world income or world welfare. On the empirical side, given observed trade flows, the authors show that gravity models are fundamentally underidentified, yet they can characterize all comparative statics for any change in bilateral trade frictions solely in terms of observed trade flows and the gravity constants. Based on these results, they derive a closed form solution of a new gravity estimator that improves upon standard reduced-form gravity regressions by directly incorporating general equilibrium effects.

Colin Hottman, Columbia University; Stephen Redding, Princeton University and NBER; and David Weinstein, Columbia University and NBER

What is Firm Heterogeneity in Trade Models? The Role of Quality, Scope, Markups, and Cost (NBER Working Paper 20436)

Hottman, Redding, and Weinstein develop and structurally estimate a model of heterogeneous multiproduct firms that can be used to decompose the firm-size distribution into the contributions of costs, quality, markups, and product scope. Using Nielsen barcode data on prices and sales, the researchers find that variation in firm quality and product scope explains at least four-fifths of the variation in firm sales. The authors show that the imperfect substitutability of products within firms, and the fact that larger firms supply more products than smaller firms, implies that standard productivity measures are not independent of demand system assumptions and probably dramatically understate the relative productivity of the largest firms. Although most firms are well approximated by the monopolistic competition benchmark of constant markups, the authors find that the largest firms that account for most of aggregate sales depart substantially from this benchmark, and exhibit both variable markups and substantial cannibalization effects.

Jonathan Eaton, Brown University and NBER; Samuel Kortum, Yale University and NBER; and Francis Kramarz, CREST-INSEE

Firm-to-Firm Trade: Imports, Exports, and the Labor Market

Customs data and firm-level production data reveal both the heterogeneity and the granularity of individual buyers, and sellers. Eaton, Kortum, and Kramarz seek to capture these firm-level features in a general equilibrium model that is also consistent with observations at the aggregate level. The researchers' model is one of product trade through random meetings. Buyers, who may be households looking for final products or firms looking for inputs, connect with sellers randomly. At the firm level, the model generates predictions for imports, exports, and the share of labor in production broadly consistent with observations on French manufacturers. At the aggregate level, firm-to-firm trade determines bilateral trade shares as well as labor's share of output in each country.

Andrew Bernard and Andreas Moxnes, Dartmouth College and NBER, and Yukiko Saito, RIETI

Production Networks, Geography and Firm Performance

This paper examines the importance of buyer-supplier relationships, geography and the structure of the production network in firm performance. Bernard, Moxnes, and Saito develop a simple model where firms can outsource tasks and search for suppliers in different locations. Firms located in close proximity to other markets, and firms that face low search costs, will search more and find better suppliers. This in turn drives down the firm's marginal production costs. The authors test the theory by exploiting the opening of a high-speed (Shinkansen) train line in Japan which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive dataset on firms' buyer-seller linkages,they find significant improvements in firm performance as well as creation of new buyer-seller links, consistent with the model.

Lee Branstetter, Carnegie Mellon University and NBER, and Matej Drev, Georgia Institute of Technology

Who's Your Daddy? Foreign Investor Origin, Multi-Product Firms, and the Benefit of Foreign Investment

In this paper, Branstetter and Drev use a rich panel of the universe of Slovenian manufacturing firms in the period 1994-2010 to explore how receiving foreign investment impacts the subsequent scale and scope of recipient firms' activities. The empirical analysis is motivated with a theoretical model in which local firms endogenously chose their product mix and export destinations. The model details how receiving foreign investment affects the way firms alter their ex-post behavior, and then shows that predictions of the model align closely with the empirical results. Using a variety of estimation techniques that allow for foreign investors' strategic selection of local firms for investment, it finds that receiving investment significantly affects the product and export market choices of local firms, leading them to expand both the scale and scope of their activities. In addition, the paper explores how heterogeneity in investor origin and the intensity of investment modulate the effects of receiving foreign investment. It finds that targets of high-intensity investment from advanced country investors subsequently outperform similar domestically owned peers to the greatest degree along measures of both scale and scope, indicative of the notion that foreign investors transfer their superior management and technology practices to the recipient firms. The findings in this paper suggest that incorporating investor heterogeneity and the multi-product, multi-destination nature of firms yields important insights for furthering the understanding of how foreign investment impacts recipient firms.

Rafael Dix-Carneiro, Duke University, and Brian Kovak, Carnegie Mellon University and NBER

Trade Reform and Regional Dynamics: Evidence from 25 Years of Brazilian Matched Employer-Employee Data

Rafael Dix-Carneiro, Duke University, and Brian K. Kovak, Carnegie Mellon University and NBER,
Trade Reform and Regional Dynamics: Evidence From 25 Years of Brazilian Matched Employer-Employee Data

Dix-Carneiro and Kovak empirically study the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. The researchers use variation in industry-specific tariff cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks, and then examine regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, the authors do not find that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, they find steadily growing effects of local shocks on regional formal sector wages and employment for 20 years. This finding can be rationalized in a simple equilibrium model with two complementary factors of production, labor and industry-specific factors such as capital, that adjust slowly and imperfectly to shocks. Next, they document rich margins of adjustment induced by the trade reform at the regional and individual level. Workers initially employed in harder hit regions face continuously deteriorating formal labor market outcomes relative to workers employed in less affected regions, and this gap persists even 20 years after the beginning of trade liberalization. Negative local trade shocks induce workers to shift out of the formal tradable sector and into the formal nontradable sector. Non-employment strongly increases in harder-hit regions in the medium run, but in the longer run, non-employed workers eventually find re-employment in the informal sector. Working age population does not react to these local shocks, but formal sector net migration does, consistent with the relative decline of the formal sector and growth of the informal sector in adversely affected regions.

James Markusen, University of Colorado and NBER

An Alternative Base Case for Modeling Trade and the Environment

The trade-and-environment literature often begins with a generic base case. Sectors differ in pollution intensities and countries have sectoral comparative advantage. Pollution comes from production, not consumption, and consumers have identical, homothetic preferences over goods and environmental quality. Policy instruments are Pigouvian taxes and tariffs. Markusen argues that this model is counter-empirical in some ways and assumes away other crucial features. The researcher offers a simple alternative base case, in which global pollution is proportional to all economic activity, and where environmental quality has an income elasticity of demand exceeding one. An income tax can fund an abatement activity, diverting resource from production and creating a terms-of-trade externality that passes some costs of abatement to the other country. The author contrasts cooperative and non-cooperative outcomes between governments of two countries differing in per-capita incomes. Leakage takes a very different form called "policy leakage" and border taxes are counter-productive. When per-capita income differences are large, a poor country may be worse off when the large country abates (reversing the usual argument on free riding) and cooperative bargaining over abatement levels may offer no gains. Finally, Markusen examines "issue linking" in bargaining when one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.

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