International Trade and Investment

Members of the NBER's International Trade and Investment Program met place in Stanford on December 1-2. Program Director Stephen J. Redding of Princeton University the meeting. These researchers' papers were presented and discussed:

Victor Couture, the University of California at Berkeley; Benjamin Faber, the University of California at Berkeley and NBER; Yizhen Gu, Jinan University; and Lizhi Liu, Stanford University

E-Commerce Integration and Economic Development: Evidence from China

The number of people buying and selling products online in China has grown from practically zero in 2000 to more than 400 million by 2015. Most of this growth has occurred in cities. In this context, the Chinese government recently announced the expansion of e-commerce to the countryside as a policy priority with the objective to close the rural-urban economic divide. As part of this agenda, the government entered a partnership with a large Chinese e-commerce firm. The program invests in the necessary transport logistics to ship products to and sell products from tens of thousands of villages that were largely unconnected to e-commerce. The firm also installs an e-commerce terminal at a central village location, where a terminal manager assists households in buying and selling products through the firm's e-commerce platform. Couture, Faber, Gu, and Liu combine a new collection of survey and transaction microdata with a randomized control trial (RCT) across villages that we implement in collaboration with the e-commerce firm. The researchers use this empirical setting to provide evidence on the potential of e-commerce integration to foster economic development in the countryside, the underlying channels and the distribution of the gains from e-commerce across households and villages.

Stephan Heblich, the University of Bristol; Stephen J. Redding, Princeton University and NBER; and Daniel Sturm, London School of Economics

The Making of the Modern Metropolis: Evidence from London

Modern metropolitan areas involve large concentrations of economic activity and the transport of millions of people each day between their residence and workplace. However, relatively little is known about the role of these commuting flows in promoting agglomeration forces. Heblich, Redding, and Sturm use the revolution in transport technology from the invention of steam railways, newly-constructed spatially-disaggregated data for London from 1801-1921, and a quantitative urban model to provide evidence on the determinants of the concentration of economic activity in metropolitan areas. Steam railways dramatically reduced travel times and hence permitted the first large-scale separation of workplace and residence to realize economies of scale. The researchers show that their model is able to account both qualitatively and quantitatively for the observed changes in city size, structure and land prices.

Lorenzo Caliendo, Yale University and NBER; Luca David Opromolla, Banco de Portugal; Fernando Parro, Johns Hopkins University; and Alessandro Sforza, London School of Economics

Goods and Factor Market Integration: A Quantitative Assessment of the EU Enlargement (NBER Working Paper No. 23695)

The economic effects from labor market integration are crucially affected by the extent to which countries are open to trade. Caliendo, Opromolla, Parro, and Sforza build a multi-country dynamic general equilibrium model with trade in goods and labor mobility across countries to study and quantify the economic effects of trade and labor market integration. In their model trade is costly and features households of different skills and nationalities facing costly forward-looking relocation decisions. They use the EU Labour Force Survey to construct migration flows by skill and nationality across 17 countries for the period 2002-2007. The researchers then exploit the timing variation of the 2004 EU enlargement to estimate the elasticity of migration flows to labor mobility costs, and to identify the change in labor mobility costs associated to the actual change in policy. Caliendo, Opromolla, Parro, and Sforza then apply their model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the EU enlargement. They find that new member state countries are the largest winners from the EU enlargement, and in particular unskilled labor. They find smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse off after the enlargement. The researchers study even further the interaction effects between trade and migration policies and the role of different mechanisms in shaping our results. Their results highlight the importance of trade for the quantification of the welfare and migration effects from labor market integration.

Wolfgang Keller, the University of Colorado and NBER, and William W. Olney, Williams College

Globalization and Executive Compensation (NBER Working Paper No. 23384)

This paper identifies globalization as a factor behind the rapid increase in executive compensation and inequality over the last few decades. Employing comprehensive data on top executives at major U.S. companies, we show that compensation is higher at more global firms. Keller and Olney find that pay responds not only to firm size and technology but also to exports conditional on other firm characteristics. Export shocks that are not related to the executive's talent and actions also increase executive compensation, indicating that globalization is influencing compensation through pay-for-non-performance. Furthermore, this effect is asymmetric, with executive compensation increasing due to positive export shocks but not decreasing due to negative shocks. Finally, export shocks primarily affect discretionary forms of compensation of more powerful executives at firms with poor corporate governance, as one would expect if globalization has enhanced rent-capture opportunities. Overall, these results indicate that globalization has played a more central role in the rapid growth of executive compensation and U.S. inequality than previously thought, and that both higher returns to top talent and rent-capture are important parts of this story.

Andrew B. Bernard, Dartmouth College and NBER; Emmanuel Dhyne, National Bank of Belgium; Glenn C.G. Magerman, ECARES & NBB; Kalina Manova, the University of Oxford; and Andreas Moxnes, the University of Oslo

The Origins of Firm Heterogeneity: A Production Network Approach

Bernard, Dhyne, Magerman, Manova, and Moxnes evaluate the firm size distribution and firm growth in the presence of production networks. Firms can be large because they attract (i) more suppliers and customers, (ii) larger or better suppliers and customers and (iii) find better matches along these supplier-buyer relationships. In a simple model of monopolistic competition, firms sell to other firms as well as to final demand. The model presents a decomposition of firm sizes into various structural components along supplier, buyer and match characteristics. Using unique data on supplier-buyer relationships across the universe of firms covering all economic activities in Belgium, the researchers present three key results. First, the production network explains all of the variance of the size distribution relative to sales to final demand. Second, inter-firm demand vastly dominates the traditional productivity channel on the supply side. Third, on both the demand and supply side, the extensive margin dominates the intensive margin. In other words: firms are big because they have many rather than important customers/suppliers.

Chong Xiang, Purdue University, and Stephen Yeaple, Pennsylvania State University and NBER

The Production of Cognitive and Non-cognitive Human Capital in the Global Economy

The quality of a country's educational infrastructure is a crucial determinant of economic well-being. Therefore, the comparisons of the relative strength and weakness of educational systems across countries are critical for both academic research and policy-making. A common approach measures the comparative quality of educational systems directly using international test scores. Aspects of educational quality that are ill-measured by exams, however, are neglected in such analyses. Xiang and Yeaple develop a general equilibrium framework that allow educational outcomes to vary in the extent to which they are readily quantified on exams. Their framework allows inference along multiple dimensions of educational quality and provides a method for aggregating over these dimensions to construct a single measure of institutional quality. Many countries that score well on international exams fair poorly according to the researchers' measure. Their comparative static results suggest important tradeoffs across eductional dimensions, and spell out the implications of educational-institution qualities for aggregate output.

Sumit Agarwal, Georgetown University; J. Bradford Jensen, Georgetown University and NBER; and Ferdinando Monte, Georgetown University

The Geography of Consumption (NBER Working Paper No. 23616)

Agarwal, Jensen, and Monte use detailed information from U.S. consumers' credit card purchases to provide the first largescale description of the geography of consumption. They find that consumers' mobility is quite limited and document significant heterogeneity in the importance of gravity across sectors. The researchers develop a simple model of consumer behavior, emphasizing the role of the durability/storability of products, to organize the main stylized facts. Heterogeneity in the storability of products across sectors generates a positive correlation between the strength of gravity and the frequency of transactions at the sector level; this correlation is a clear feature of the data. Using daily rain precipitation from thousands of weather stations in U.S., Agarwal, Jensen, and Monte show that shocks to travel costs change the spatial distribution of expenditure, and they do so differentially across sectors: hence, the level and heterogeneity of travel costs shape the level and elasticity of any merchant's demand. This evidence suggests that incorporating the demand-side is essential to analyzing the distributional consequences of local and aggregate shocks across regions. These results also suggest the demand-side is critical to understanding the location of firms and employment in the large and understudied service sector.

Thibault Fally, the University of California at Berkeley and NBER, and James E. Sayre, the University of California at Berkeley

Commodity Trade Matters

Primary commodities account for approximately 16 percent of world trade, yet they are used extensively as intermediate inputs into many production processes. In light of this, Fally and Sayre show that ignoring several key features of trade in commodities leads to a large understatement of aggregate gains from trade despite their relatively small share of world trade. The researchers quantify the welfare gains from international trade when they account for specific characteristics of most primary commodities: i) a low price elasticity of demand as a result of difficulty in finding substitutes, ii) a low price elasticity of supply, and iii) a high concentration of natural resources and production among a few countries. For instance, copper is difficult to replace in the electronic equipment industry, the supply and demand for copper vary only slightly with changes in prices, a large share of its supply comes from Chile and copper accounts for half of Chilean total export revenues. Fally and Sayre explicitly account for these features in a general-equilibrium model of consumption, production, and input-output linkages. In their simulations, they confirm that ignoring these specific features of commodities leads to a wide understatement of the aggregate gains from trade.

Jonathan I. Dingel, the University of Chicago and NBER; Solomon M. Hsiang, the University of California at Berkeley and NBER; and Kyle C. Meng, the University of California at Santa Barbara and NBER

The Spatial Structure of Endowments, Trade, and Inequality: Evidence from the Global Climate

This paper shows that welfare inequality in a trading network is greater when productivities are rearranged such that neighboring locations are more similar. An increase in the spatial correlation of productivities amplifies cross-country welfare dispersion by increasing the correlation between productivity and the gains from trade. To empirically examine this prediction, Dingel, Hsiang, and Meng study how global agricultural trade responds to exogenous changes in the spatial correlation of agricultural productivity driven by a naturally occurring global climatic phenomenon. As predicted, higher spatial correlation in cereal yields increases the correlation between productivity and the gains from trade. In a forecasting application, climate-change projections for 2099 that incorporate this general-equilibrium effect exhibit substantially greater global welfare inequality, with higher welfare losses in most African, South American, and many Asian countries.

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